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Distributor's Link Magazine Spring 2019 / Vol 42 No2

62 THE DISTRIBUTOR’S

62 THE DISTRIBUTOR’S LINK Roman Basi Roman Basi is the President of The Center for Financial, Legal & Tax Planning, Inc. Roman graduated from Milliken University obtaining a Bachelor’s of Science Degree with a minor in Psychology. He earned an MBA from Southern Illinois University with an emphasis in Accounting and recevied his JD degree from Southern Illinois University. Roman is a licensed attorney in Illinois, Missouri and Florida and is in high demand for his expertise in financial, legal and tax matters. His areas of expertise include mergers and acquisitions, contracts, real estate law, tax and estate planning. WORKING CAPITAL - WHAT IS IT AND WHY IS IT IMPORTANT? Working Capital is an important concept for every business to understand. From Amazon or Apple to a small locally owned business, business owners need to understand the importance of working capital. At its heart, working capital is defined as, “the amount of a company’s current assets minus the amount of its current liabilities,” or simply, a company’s available capital for daily operations at any given point in time. Thus, working capital provides a measurement to determine a company’s operational efficiency and short-term financial health. At the basis of working capital is the calculation, which is generally the difference between the current assets and the current liabilities. Current assets are assets that can be converted into cash within one year or less. This would include assets such as cash equivalents, marketable securities, accounts receivable, inventory, and prepaid expenses. While current liabilities include short term debt such as accounts payables, accrued liabilities, and other similar debts. Subtracting the current assets by the current liabilities will provide the working capital figure. The working capital is positive when there is an excess of current assets compared to current liabilities. However, a working capital calculation not only plays a role as a financial measuring tool, but it can play a large role in Merger and Acquisition (M&A) transactions. As stated above, a working capital calculation is generally calculated as current assets less current liabilities. However, the calculation of working capital CONTRIBUTOR ARTICLE in an M&A transaction can be far different as the formula will be dictated by the asset or stock purchase agreements. Some transactions will involve cash or debt in the working capital calculation, some transactions may exclude certain assets, and some transactions may exclude certain liabilities, thus creating an impact on the Seller that can vary on a spectrum. The spectrum will generally be determined in the Purchase Price or Working Capital section of the stock or asset purchase agreement. When the working capital determination is made a target will be set and the operations of the selling company prior to the target date can have a drastic impact on the closing funds. For example, the working capital language of an asset purchase agreement may state, “a purchase price of ,000,000 minus the amount by which the Working Capital as of the Closing Date varies from the six month trailing average of the Working Capital.” The asset purchase agreement will then go on to describe the calculation methodology of the Working Capital. Therefore, a working capital target is set by a six month average trailing the closing date of the transaction. If the Working Capital at closing exceeds the average monthly working capital balance for the six months prior to closing, the Seller generally walks away with more funds at closing. However, if the Working Capital at closing is less than the average monthly working capital balance for the six months prior to closing then the purchase price may be reduced by the amount equal to the difference of the six month Working Capital average. CONTINUED ON PAGE 134

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