Working capital: the software M&A tripwire

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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Working capital sits right at the top of buy-side due diligence lists (what else is on that list? See this article). All the more confusing why this topic is so poorly understood in M&A transactions, causing so much aggravation between buyer and seller post-closing. 

In this article, I explain why working capital matters in software - and how to stop trippin’ over it. 

Most deals are done on a debt-free, cash-free basis. Meaning that the buyer expects the target to have a normalised level of working capital. Enough to keep the business running without having to put up additional cash.

Before closing, buyer and seller agree on this normalised figure, which is then included in the SPA. After closing, adjustments are made based on the actual level of working capital delivered.

Read on to learn:

1. Why working capital in software doesn't work the same way as in other industries

2. What bankers don't (want you to) know about working capital

3. Practical advice for software serial acquirers

1. Why working capital in software doesn't work the same way as in other industries

Like most industries, a software company’s working capital can vary significantly due to seasonality or large customer orders. Crucial to set it at a level that truly reflects business needs. Several methods exist, all based on averaging: over the last 12 months, 2 years, or on a quarterly basis. 

So why the controversy?

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