Selling a business: how much working capital belongs in the price?

Understand the business behind the earnings

HSLU’s release of 18 September 2024 says that listed Swiss companies remain broadly well financed despite higher interest rates. The release puts interest-bearing debt at CHF 256 billion at the end of 2023, around 4% above the previous year.

For working-capital management, HSLU notes that DWC rose from 58 days before the Covid crisis to 65 days. At the same time, DSO fell from 59 to 51 days over ten years. The analysis covers 153 listed companies and is therefore not an SME benchmark.

That is useful background, but it is not the same as a transaction-specific analysis. In a business sale, the real question is simpler: how much capital does the business need between delivery and payment, and what should count as normal working capital in the deal?

An extra 15 days ties up CHF 300,000 in this example

Assume annual revenue of CHF 7,200,000, entirely on credit. We spread it evenly over a simplified 360-day year and exclude VAT. With average collection after 45 days, receivables amount to CHF 900,000: CHF 7,200,000 ÷ 360 × 45. At 60 days, they amount to CHF 1,200,000.

For this model, operating net working capital means trade receivables plus inventory less trade payables. Inventory stays at CHF 600,000 and payables at CHF 400,000. Capital tied up therefore rises from CHF 1,100,000 to CHF 1,400,000.

The additional CHF 300,000 is a funding requirement during the transition to a higher receivables balance, not an annual CHF 300,000 loss. With unchanged revenue and costs, operating profit remains unchanged in this model. Impairments, financing costs and defaults require separate consideration.

What is agreed for the completion date

A separate example now assumes an explicit contractual rule. Buyer and seller agree a reference working-capital amount of CHF 1,100,000. At that level, the provisional price for the shares is CHF 4,000,000. Deviations in eligible working capital at completion adjust the price franc for franc in this example. All other price components remain unchanged.

If CHF 900,000 is delivered instead of CHF 1,100,000, the calculation is CHF 4,000,000 + CHF 900,000 − CHF 1,100,000 = CHF 3,800,000. If CHF 1,300,000 is delivered, it is CHF 4,200,000. This is a simplified assumed clause, not a legally mandated rule or a mechanism suitable for every sale.

The higher receivables balance in the first example would not automatically create value. Among other things, the receivables must be assessed for collectability, consistent accounting treatment and eligibility under the contract. An overdue invoice is not equivalent to cash in the bank.

Four records that strengthen the negotiation

A clear monthly history is more informative than a conveniently chosen balance-sheet date. Before a sale, establish which funding needs reflect normal operations and which items require explanation. In my view, it also makes sense to start organising these points early, often about 3 years before the planned transaction, so there is time to correct weaknesses without pressure.

• Monthly receivables, inventory and trade payables, for example over the last 24 months, explaining seasonal peaks.
• Receivables ageing, defaults and agreed customer payment terms.
• An inventory schedule covering stock duration, valuation policies and slow-moving items.
• An agreed definition separating working capital from financial debt, cash and other adjustments. Avoid double counting.

A sound handover, beyond a standalone price

From a financing and sales perspective, price, cash movements and ongoing funding needs belong together. Reducing inventory may release cash temporarily while weakening the ability to fulfil orders after handover. Longer supplier payment terms are only sustainable if genuinely agreed and workable.

In my view, overdue receivables and slow-moving inventory deserve particular attention in negotiation. That is often where it becomes clear whether working capital is a normal operating need or whether write-offs and contractual adjustments are needed. A standalone price says little if the handover is not operationally sound.

The business calculator provides a starting point for a sale scenario. Bring monthly balance sheets and open-item schedules to the personal discussion. These help clarify the price being negotiated, what should remain in the business and the reserve required after acquisition.