Selling Your Business? The 2 Most Important Numbers to Analyze

Last Updated Jul 29, 2010 3:48 PM EDT

I was on my way home when I got the call I had been expecting from the mergers and acquisitions firm I was using to sell my company. I pulled over -- this conversation was going to require some focus.

"We have two offers we'd like to meet to discuss," said my banker.

My pulse leaped as I tried to contain myself. "Meet?!" I said anxiously. I didn't want to wait any longer to find out what my business was worth in the eyes of an acquirer. "Are you kidding me? What are they offering?"

My advisers went on to describe the only number I cared about at the time: the purchase price the acquirers were offering to buy my business.

I didn't realize how naive I was until I sat down with my accountant, who dissected both offers. At first blush, Bid A looked like the better of the two because the purchase price was higher. My accountant, however, encouraged me to look more carefully at Offer B. Offer B included a detailed description of how the buyer would calculate the working capital I was required to leave in the company at closing.

When I first read the paragraph about working capital, I glossed over it, assuming it was irrelevant MBA-speak. Truth be told, I didn't really know what working capital meant. I had a vague notion that it had something to do with the money we needed in the bank to pay for things, but I certainly didn't think it made much difference to the relative merits of each offer.

My accountant described that, given the way the potential purchaser was offering to calculate working capital, Offer B was allowing me to withdraw most of the money we had accumulated in our bank account before the deal closed -- and since we charged our customers up front, we had built up a significant amount of cash. The working capital calculation in Offer B had the effect of raising the value by more than 15 percent, making it at least as good as Offer A.

If you get an offer to buy your company, the second most important number on the page may be the working capital calculation. If your offer does not include details on the working capital calculation, be sure to lock that number down before you agree to anything.

(photo courtesy of Flickr/landofnodstudios)

  • John Warrillow

    John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies. Most recently, he transformed Warrillow & Co. from a boutique consultancy into a recurring revenue model subscription business, which was acquired by The Corporate Executive Board. Watch this video to hear John's thoughts on starting and growing a business you can sell.

    John and his book "Built to Sell" have been featured in CNN, MSNBC, Time magazine and ABC News. John was recognized by BtoB Magazine's "Who's Who" list as one of America's most influential business-to-business marketers.

    John now divides his time between homes in Toronto, Canada, and Aix-en-Provence, France. He is a husband and father of two rambunctious boys.