What Does
Non-Cash Working Capital Mean?
Non-cash working capital (NCWC) is calculated by taking all current assets net of cash and subtracting all current liabilities. Usually during due diligence, the target’s historical NCWC is calculated on a monthly basis for two to three years to understand how much working capital the business needs to support ongoing operations.
Divestopedia Explains Non-Cash Working Capital
Non-cash working capital is one of the most contentious issues when negotiating the buying or selling of a business. When a buyer purchases a business, the purchase price will typically include consideration for all the assets of the business needed to conduct operations as they have been conducted in the past. These assets would include a reasonable level of non-cash working capital.
Example:
A company with $20 million in revenue has operated historically with 15% of sales in non-cash working capital or $3 million. The industry average is 10% of sales in NCWC or $2 million. This means that this company’s working capital has been managed with a higher working capital average than its industry peers. A buyer may require that the historical $3 million of NCWC be left in the business as part of the deal, even if all other similar companies only require $2 million. For this reason, business owners should know what an appropriate level of working capital is, and manage the business to that level. This ensures cash is not left tied up in working capital at the time of sale, but rather is unlocked prior to the sale and flows back to the owner.