Net Working Capital: What is it and How is it Used?

Net Working Capital: What is it and How is it Used?

 

LUTZ BUSINESS INSIGHTS

 

net working capital: what is it and how is it used?

bill kenedy, LUTZ consulting and m&a shareholder

 

A commonly misunderstood topic in M&A transactions is the concept of net working capital (NWC). This is recognized as a predetermined amount of capital that is included in the purchase price in a business sale transaction. Understanding what NWC encompasses and how this amount is calculated is an important step in the  M&A process.

 

What is Net Working Capital?

Net Working Capital is a measure of operating liquidity available to a business at a given point in time. Major NWC accounts include accounts receivables, inventory and accounts payable. In short, it can be calculated as your business’s current assets (less cash) minus its current liabilities. Here is an example calculation for NWC:

 Values from the balance sheet

 

Net Working Capital in Business Transactions

In most transactions, NWC stays with the company being acquired as it is considered a necessary operating asset of the business. However, by monthly tracking of collections, payments, and inventory levels, sellers of a business can minimize the amount of money locked up in NWC in order to retain more cash when the business sells.

For example, if the selling company has historically paid its vendors in 15 days even though they have 30 day payment terms, the company could adjust their payment timing to increase cash on hand and reduce NWC.  This change would need to occur well before starting an M&A process (more than a year).

The reason for needed to work on your NWC well before embarking on an M&A process is that most buyers will require a NWC peg based on the company’s historical averages.

A problem with relying on historical results is that the information can often be skewed. Seasonality, peaks and troughs, can often affect the validity of a company’s historical results of NWC. To get a more accurate estimate, buyers will establish “trends” by analyzing a company’s historical NWC over a 12-18 month period.

 

Overall, not understanding and addressing net working capital issues earlier in the M&A process could have a significant impact on the business transaction and the ultimate amount of cash the seller realizes from the transaction. If you have any questions regarding net working capital, please contact Lutz M&A.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Board Member

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OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

EBITDA Adjustments + 5 Expense Categories You Should Review

EBITDA Adjustments + 5 Expense Categories You Should Review

 

LUTZ BUSINESS INSIGHTS

 

ebitda adjustments + 5 expense categories you should review

dani sherrets, financial analyst

 

When assessing how to value a business for an M&A deal, buyers will typically focus on adjusted EBITDA as their primary metric. EBITDA looks at the business’ profitability from its core operations before the impact of capital structure, and non-cash items like depreciation are taken into account. Adjusted EBITDA removes various one-time, irregular, non-recurring items that are not related to the day-to-day, ongoing operations of a business. Since companies are often valued based on a multiple of Adjusted EBITDA, these expense items directly impact the value of your business. For example, if a business is valued at 6.0x EBITDA then simply adding back $500,000 of irregular expenses adds $3 million to the purchase price. This is why buyers pay very close attention and may disagree with certain adjustments. For more detail on this topic, please refer to our previous blog, “Understanding EBITDA and Normalizing Adjustments”.

The following are five most common EBITDA adjustments:

#1 Owner salary & Compensation

If the owner’s salary is deemed to be above market-rate levels, an add-back for any excess salary would be appropriate. Salary collected by spouses or family members that are not active in the business will also be removed.

 

#2 Other owner-related Expenses

If the owner has personal or business expenses that would not continue after the deal, they would be added back. Examples include personal vehicles, insurance, travel, entertainment, and club memberships. These items might be on the income statement purely as a tax mitigation strategy and are not essential to operate the business.

 

#3 Rent expenses

If a company pays above or below market rent, the income statement should be adjusted accordingly to reflect a true market rent level. If the real estate is owned by the business, but it is not critical to operations, any related expense (insurance, maintenance) would be removed from EBITDA. 

#4 Gaps in the Management Team

Should a buyer need to hire new executives to fill out the team, there would likely be a negative adjustment to EBITDA for salary and other items related to such hires.

 

#5 Legal/Litigation Items

One-time or highly unusual lawsuits are considered to be add-backs. Importantly, this would not include typical ongoing legal expenses that are common to a business. 

 

Are you considering an exit or recapitalization and have questions about EBITDA addbacks and their potential impact on the value of your business?  If so, please contact us.

 

ABOUT THE AUTHOR

402.796.7045

dsherrets@lutz.us

LINKEDIN

DANI SHERRETS + FINANCIAL ANALYST

Dani Sherrets is a Financial Analyst at Lutz with over three years of relevant experience. She specializes in merger and acquisition advisory services and business valuation.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • National Association of Certified Valuators and Analysts, Member
  • Certified Valuation Analyst
EDUCATIONAL BACKGROUND
  • BBA, Academy of Economic Studies, Bucharest, Romania
  • MBA in Finance, Bellevue University, Omaha, NE

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VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Lutz M&A Advises eX² Technology on its Recapitalization by Columbia Capital

Lutz M&A Advises eX² Technology on its Recapitalization by Columbia Capital

 

LUTZ BUSINESS INSIGHTS

 

LUTZ M&a ADVISES EX² TECHNOLOGY ON ITS RECAPITALIZATION BY COLUMBIA CAPITAL

BILL KENEDY, LUTZ CONSULTING AND M&A SHAREHOLDER

 

Lutz M&A announced that it served as exclusive financial advisor to eX² Technology (eX²) in connection with its recent recapitalization by Columbia Capital (Columbia).  Columbia is private equity group based in Virginia that focuses on communication technology businesses.

Founded in 2015 by a team of seasoned communications and critical infrastructure professionals, eX² designs, constructs, maintains and commercializes some the largest and most complex communication and critical infrastructure project in the United States.   Based on their experiences, the eX² founders recognized a noticeable industry gap in genuine partnerships between those in need of better broadband services and the fiber optic design-build industry. After assembling a team of innovative, experienced and knowledgeable experts, our founders formed eX² Technology with a mission to transform the way the industry does business and in just three short years, eX² has increased its workforce five times over, completed work in 24 states and added more than 100 projects to its diverse portfolio.

On working with Lutz M&A, eX²’s President Jim Kawamoto observed, “We had a bit of a unique situation transitioning from our original equity partner.  Bill and his team were integral in finding a solution that worked for everyone.”

Commenting on the transaction for Lutz M&A, Bill Kenedy said, “eX² is a solid company with a high-quality management team.  We believe the combination of eX² and Columbia will produce great results for their customers.” 

 

 

Acquired by Platform Capital.

Lutz M&A served as the exclusive financial advisor to Perrin Manufacturing.

 

 

Acquired by Christensen Farms.

Lutz M&A served as the exclusive financial advisor to SmithCo Manufacturing Inc.

 

eX2 Technology

 

Acquired by Columbia Capital.

Lutz M&A served as the exclusive financial advisor to eX² Technology.

 

Fantasy's Logo

 

Acquired by Casey's General Stores.

Lutz M&A served as the exclusive financial advisor to Fantasy's, Inc.

 

AcquireWeb

 

Acquired by Claritas, Inc.

Lutz M&A acted as the sell-side advisor to AcquireWeb

 

C&W Transportation logo

 

ACQUIRED BY PLATFORM CAPITAL.

Lutz M&A was the exclusive financial advisor to C&W

 

 

ACQUIRED BY EVOLVE CAPITAL.

Lutz M&A was the exclusive financial advisor to Hands of Heartland

 

ACQUIRED BY GREAT RANGE CAPITAL.

LUTZ M&A WAS THE EXCLUSIVE FINANCIAL ADVISOR TO LABOR SOURCE LLC

Triage

 

ACQUIRED BY MCCARTHY CAPITAL.

Lutz M&A was the exclusive financial advisor to Triage Staffing

CCW, LLC

huhot

 

Acquired by SUN CAPITAL PARTNERS, INC.

Lutz M&A was the exclusive financial advisor to CCW, LLC

Hockenbergs Logo

 

ACQUIRED BY TRIMARK USA LLC 

Lutz M&A was the exclusive financial advisor to Hockenbergs

Linoma Software

 

Acquired by Help/Systems, LLC

Lutz M&A acted as the sell-side advisor to Linoma Software

MDH

 

Lutz M&A was the exclusive financial advisor to Midwest Door & Hardware

nifco

 

Lutz M&A was the exclusive sell-side advisor to NIFCO Mechanical

HKS Medical Information

 

Acquired by ARGENTA PARTNERS LP

Lutz M&A was the exclusive financial advisor to HKS

Infinity Data Solutions

 

Acquired by WORLD DATA PRODUCTS

Lutz M&A was the exclusive financial advisor to Infinity Data Solutions, LLC

Provider Plus

 

Lutz M&A was the exclusive financial advisor to Providers Plus

M7

 

MAJORITY RECAPITALIZATION

Lutz M&A was the exclusive financial advisor to M7 Logistics

Smeal

 

MANAGEMENT BUYOUT

Lutz M&A was the exclusive financial advisor to Smeal Manufacturing

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Issues During the Due Diligence Process in M&A Transactions

Issues During the Due Diligence Process in M&A Transactions

 

LUTZ BUSINESS INSIGHTS

 

issues during the due diligence process in m&a transactions

bill kenedy, LUTZ consulting and m&A shareholder

 

Completing a due diligence analysis is a critical step in the M&A process. Due diligence is conducted to validate value proposition assumptions, evaluate strategic and financial risks, and support deal decision making. Many times, there are issues that arise in these findings that may negatively impact a deal going through.

Here are a few common issues found during the due diligence process:

  • High customer concentration
  • Overstated EBITDA add-backs
  • Working capital issues
  • Unsustainable growth projections
  • Low EBITDA margins
  • Unusual revenue swings
  • Inaccurate financial statements
  • Top management weakness

“I’ve seen many of these issues arise during the due diligence phase of different M&A transactions. The most common issue revolves around working capital.  Typically the definition and calculation of the ‘working capital peg or target’ is addressed late in the sale process during purchase agreement negotiations.  Many times this leads to disagreements which is why we strive to address working capital expectations with buyers as early in the process as possible,” said Lutz Consulting and M&A Shareholder, Bill Kenedy.

Although these are common issues, not all transactions are subject to negative findings. Here are a few things to keep in mind to help you prepare your business for a clear due diligence analysis:

1. Know that a buyer will want to make themselves comfortable that your company is sustainable. Meaning your business doesn’t have any significant risk to future sales, profitability and growth.

2. A buyer will want to confirm that your company’s financial performance is as good as you have portrayed it to be. With this in mind, know that they will check every aspect of your performance, including confirming revenues, costs and EBITDA adjustments.

3. Companies with audited or reviewed financials tend to have a better due diligence experience than those without CPA prepared quality financials.

4. If you have a large customer that will be hard to replace, this will typically reduce the amount buyers are willing to pay.

5. If there are gaps in your management team, your company’s EBITDA will be negatively adjusted for the cost of hiring and compensation of new executives.

Issues uncovered during due diligence may result in change of deal terms and could prevent a deal from closing. So, it’s important to consider these factors when deciding to sell your business.

With proper preparation, negative surprises during the due diligence process can be eliminated. If you have questions concerning the due diligence process of an M&A transaction, please contact Lutz M&A.

 

Merger & Acquisition Basics Toolkit

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Exit Planning Strategies for Business Owners

Exit Planning Strategies for Business Owners

 

LUTZ BUSINESS INSIGHTS

 

exit planning strategies for business owners

Business owners are good at dealing with everyday decisions, but they often forget that a main reason they are in business is to be rewarded for building a valuable business. The issue many are facing these days is that research indicates less than 10% of business owners have a formal exit strategy in place. Led by Bill Kenedy of Lutz M&A, this presentation will cover the questions business owners should be asking themselves and steps to help make the decision process easier.

 

RECENT POSTS

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850

Lutz M&A Advises Fantasy’s, Inc. on its Acquisition by Casey’s General Stores

Lutz M&A Advises Fantasy’s, Inc. on its Acquisition by Casey’s General Stores

 

LUTZ BUSINESS INSIGHTS

 

lutz m&a advises fantasy’s,  inc. on its acquisition by casey’s general stores

bill kenedy, LUTZ consulting and m&a shareholder

 

Lutz M&A announced that it served as exclusive financial advisor to Fantasy’s, Inc. in connection with its recent acquisition by Casey’s General Stores, Inc. (“Casey’s).  Casey’s is a Fortune 500 company (NASDAQ CASY) operating over 2,100 convenience stores in 16 states in the Midwest and the South. Casey’s is currently the fourth largest convenience store chain and the fifth largest pizza chain in the United States.

Founded in 1989, Fantasy’s is Omaha’s premium chain of gas stations, convenient stores and touchless car washes.  Casey’s plans to leave the popular touchless tunnel car washes in place and continue to use the Ride the Wave brand, while bringing its famous pizzas to the nine Omaha metro area locations.

“The acquisition of the Fantasy’s chain is an excellent fit to our existing store base and will expand our presence in the greater Omaha market,” said Terry Handley, President and CEO of Casey’s General Stores, Inc.  “They are a very well established and managed chain, and we are excited to welcome the Fantasy’s employees to the Casey’s family.”

On working with Lutz M&A, Fantasy’s owner Karen Spaustat observed, “Lutz did a great job guiding us through the process of marketing our company and introducing us to several interested parties. They ultimately helped us find the right fit with Casey’s General Stores.”

Commenting on the transaction for Lutz M&A, Bill Kenedy said, “It was a great opportunity to represent this long-term client of Lutz in this transaction.  We are happy for the Spaustat family and believe Casey’s acquired a great company in Fantasy’s.

 

Fantasy's Logo Casey's logo

 

About Lutz M&A, LLC: Lutz M&A is a Nebraska-based mergers and acquisitions advisory firm, serving lower middle-market businesses in the Midwest across a range of industries. Lutz M&A is committed to providing its clients with a comprehensive, skilled and professional marketing process not typically available to smaller market companies. For more information, visit www.lutz.us.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

VIEW MODIFIED SUMMER HOURS HERE

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850