All insightsBUSINESS SALE / WORKING CAPITAL

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

Profit is not the same as cash on hand. The models show how working capital and contract mechanics influence the sale price.

By JB Schmid Consulting4 min read
Inventory and the working capital it ties up
AI-generated illustration

The essentials

  • EBITDA is not a bank balance. Receivables and inventory can tie up capital even when revenue is already booked.
  • Review working capital over several months. Seasonality and growth need to be part of the analysis.
  • The price adjustment follows the agreed contractual mechanism. Cash released is not recurring additional profit.

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?

    Source: HSLU · IFZ Finanzierungs- und Treasurystudie: Medienmitteilung vom 18. September 2024

    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.

      OUR ILLUSTRATION

      Working capital tied up at the same annual revenue

      45-day collection period

      CHF 1'100'000

      60-day collection period

      CHF 1'400'000

      Our illustrative calculation, not market data: annual revenue CHF 7,200,000 ÷ 360 × 45 or 60 days + CHF 600,000 inventory − CHF 400,000 trade payables. Evenly distributed credit sales, excluding VAT. Balance-sheet amounts, not annual costs.

      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.

        OUR ILLUSTRATION

        Illustrative share price after the working-capital adjustment

        Working capital delivered: CHF 900,000

        CHF 3'800'000

        Working capital delivered: CHF 1,100,000

        CHF 4'000'000

        Working capital delivered: CHF 1,300,000

        CHF 4'200'000

        Separate completion-date contract example: CHF 4,000,000 provisional share price + eligible working capital − CHF 1,100,000 reference amount. Other price components unchanged. Before taxes and transaction costs; not a business valuation or universal contractual rule.

        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.

          Common questions

          Is working capital the same as cash in the bank?

          No. Here it means receivables plus inventory less trade payables. Bank balances and financial debt are excluded. In an actual sale, the expressly agreed definition determines the treatment.

          Are 45 or 60 days recommended payment terms?

          No. Both are illustrative assumptions. A 360-day year simplifies the calculation. Actual collection periods must be determined from business data using the chosen methodology.

          Sources & further reading

          1. HSLU · IFZ Finanzierungs- und Treasurystudie: Medienmitteilung vom 18. September 2024

          General information. Examples and assumptions do not replace a review of your business or individual legal, tax and investment advice.

          Prepared with AI assistance and editorially approved before publication.

          Joel Schmid
          Your conversation partnerJoel Schmid

          Joel Schmid combines banking experience with the perspective of an entrepreneur and property investor. His focus: business sales, negotiations and the next use of capital.

          JB SCHMID CONSULTING

          What do these figures mean for you?

          Start by exploring your scenario. Joel Schmid is your personal contact for discussing your objectives and the next steps.

          LATEST ARTICLES

          Explore further

          Ideas, figures and perspectives for your next decision.

          Browse the archive
          Newest firstSwipe or browse
          A workspace overlooking a Swiss lake landscapeSwitzerland
          3 min read

          Swiss market entry: how long does your reserve finance customer acquisition?

          Swiss consumer sentiment gives context, but no sales forecast. The key question is how long your reserve lasts.

          Read article
          An existing property and new investment possibilitiesProperty
          3 min read

          Short-term rentals: higher turnover does not mean higher free earnings

          Short-term rentals can raise turnover, but free cash flow, financing capacity and local rules decide. A sober pre-purchase calculation is essential.

          Read article
          Cross-border trade and Swiss operating costsSwitzerland
          4 min read

          Euro revenue, Swiss franc costs: Can your Swiss site pass the exchange-rate test?

          The piece measures the open EUR/CHF position of a Swiss site and shows what remains after revenue and costs are netted.

          Read article
          An existing property and new investment possibilitiesProperty
          4 min read

          A 6% yield on yesterday’s price: what is your property capital earning today?

          Compare the historical rental yield, the current sale value and a new project in the same calculation. Three original charts show the capital base, the proceeds that can really be redeployed, and the role of time and downside risk in project returns.

          Read article
          An apartment building model as a basis for financingProperty
          3 min read

          Financing first: how much equity does your property tie up?

          Why the financeable amount comes before the interest-rate comparison. Two charts illustrate equity requirements and cash flow at different financing ratios.

          Read article
          Business value and productive assetsBusiness
          2 min read

          Valuing your company: understand EBITDA, test the assumptions

          How adjusted EBITDA and valuation multiples work together. An illustrative example and a practical starting point for Swiss SME owners.

          Read article
          Deferred payments connecting buyer and sellerBusiness
          2 min read

          Earn-outs and vendor loans: the same price, a different risk

          Compare immediate cash, contingent consideration and vendor financing. An illustrative payment example and questions for a sale negotiation.

          Read article
          Sale proceeds and the next chapterBusiness
          2 min read

          Company value and sale proceeds: how much capital actually arrives?

          Bridge enterprise value to equity value and cash at completion. A practical proceeds example for owners considering a business sale.

          Read article
          1–3 / 8 articlesBrowse the archive