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How Working Capital Affects Your Company's Value

The less working capital your business requires, the more it will be worth--and vice versa.

Video Transcript

00:11 John Warrillow: When it comes to the value of your company, keep in mind that an acquirer has to write two checks when they buy your business. They have to write one to you, obviously. But they also have to write a second check and the second check is actually for working capital. It's the money that your business needs in the bank the day you hand over the keys to the acquirer.

00:33 Warrillow: The challenge is that both of those checks are funded from the same wallet. The acquirer's wallet. And so if your business needs a lot of working capital, it needs lots of money in the bank to meet it's immediate obligations that means they're gonna write you a smaller check. The inverse is also true. Meaning, if your business just spits out cash because you've got a subscription model or you charge a big chunk of what you do up front, the acquirer's gonna come along and say, "Hey, we don't need to inject any working capital in this business, therefore we're happy to write a bigger check to the owner." So those things work a little bit like a child's teeter totter. One goes up when the other goes down. The more valuable company is the one that just spits out cash like a cash machine.

Last updated: Jan 2, 2014

JOHN WARRILLOW | Columnist | Sellability

John Warrillow’s new book, The Automatic Customer: Creating a Subscription Business In Any Industry will be released on February 5, 2015. John is also the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a company dedicated to helping business owners improve the value of their company.

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