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Home Podcast How Working Capital Impacts the Value of Your Business

How Working Capital Impacts the Value of Your Business

How Working Capital Impacts the Value of Your Business

Gil Ostrick

Business Appraiser

Listen in as we discuss advanced topics related to valuing businesses in the middle market, including how working capital affects value, why EBITDA isn’t the best metric, why operational experience is important to valuing a company, and more. We take a deep dive into the world of working capital in M&A transactions with the ‘King of Working Capital.’ Learn the components of working capital and how to properly assess each component to value a business accurately. We also discuss important factors to consider when valuing a company, maximizing the value of your business, typical EBITDA multiples, and the relationship between risk and return.

Guest Profile

Gil has 18 years of experience in manufacturing and distribution companies and was head of due diligence for a $1.5 billion sales conglomerate performing operational, financial, and valuation analysis to acquire companies. Gil also has experience as a corporate controller of a $300 million American Stock Exchange-traded manufacturer, where he installed management reporting systems and controls, saving the company at least $10 million annually. He was responsible for developing strategic plans to mitigate operating risks and measure returns on operating assets and income. He was responsible for 10 operating divisions for all financial reporting, budgeting, and cash flow/profit improvement projects. and was involved in numerous purchases or sales of business units and crisis management.

Topics Covered

  • Is operational experience important to valuing a company? Does the appraiser need to understand the operations of the business? [6:15]
  • How important is predictability of the revenue and EBITDA if the buyer is purchasing the business for strategic purposes? [7:05]
  • What are you really buying when you are buying a business? [7:45]
  • How long does it take an appraiser to learn about a company before they value the business? What aspects of the business does the appraiser need to learn about? [8:25]
  • What are current EBITDA multiples for manufacturing companies? [10:35]
  • Is EBITDA the best metric for valuing a business? [11:30]
  • Why is EBITDA so common if it isn’t the most accurate metric? [12:35]
  • What are EBITDA multiples for publicly held companies? [13:40]
  • What cash flow metrics do private equity firms use? [15:00]
  • What is adjusted EBITDA? [15:25]
  • Should discounted cash flow be used to value a business? [16:20]
  • What should you know about working capital when selling or valuing a company? [18:05]
  • Why is working capital important to consider when valuing a company? [19:55]
  • Why is working capital usually included in the price in an M&A transaction? [20:20]
  • What are the most common errors when calculating working capital? [20:40]
  • Do most buyers use the same method for calculating working capital? [21:55]
  • What is the difference between GAAP and Super-GAAP? [24:45]
  • How big can a post-closing working capital dispute be? [26:35]
  • How do you prevent post-closing working capital disputes? [29:00]
  • Should the seller involve their CPA in negotiating the working capital language in the purchase agreement? [29:35]
  • How long is a typical working capital clause in a purchase agreement? [30:20]
  • Is working capital defined in the LOI? [31:45]
  • How does a working capital true-up work? [32:05]
  • How easy is it for a buyer to manipulate working capital targets to their advantage? [32:35]
  • What is the number one thing you can do to increase the value of your business? [35:25]
  • How should you prepare your business for sale? Is there anything different you should do from running your company on a daily basis? [39:45]
  • What is a quality of earnings (QOE) analysis? [42:05]
  • What are the most common factors that affect the value of a business? [43:35]
  • What is the essence of business valuation from a buyer’s point of view? [45:50]
  • Is the EBITDA multiple essentially a judgement regarding the risk inherent in the business? [47:05]
  • What is the relationship between the risk and return? [48:25]
  • How can the seller maximize the value of a business by minimizing risks? [49:05]
  • How can the seller maximize the EBITDA multiple? [50:40]
  • How common are multiples exceeding 5.0 in the middle market? [52:50]
  • Why do businesses in certain industries sell at higher multiples? [53:35]

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