Working Capital – Manage Your Money Ahead of the Sale!

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“Net working capital” is your “current assets” (saleable inventory and accounts receivable) less your “current liabilities” (accounts payable).  Nearly all financial sponsors will expect that you leave behind enough net working capital to continue to sustain the business (in other words, they do not expect to put more cash into the company to sustain its current operations).

The problem is that this working capital represents CASH THAT YOU INVESTED IN YOUR BUSINESS that you won’t be repaid in the sale.  You bought the raw materials, you paid all of the out-of-pocket costs to produce the finished goods (both in inventory and sold to customers), and those receivables should be yours!

There is no firm practice regarding how to measure how much net working capital a business should have at any given time.  The most common practice is to look at your balance sheet over the twelve months leading up to the sale (or when the valuation is decided), take the monthly average, and (with possible adjustments if the business is growing or declining) use that average to adjust the purchase price up or down depending on how much net working capital is left with the busines at closing.

But you can and should proactively manage your working capital so that your business runs more efficiently leading up to a sale.  Doing so will prove to an acquirer that your business is sustainable with less working capital investment – with less cash tied up in inventory – but you must reset your business sufficiently in advance of a sale to prove to an acquirer that your business can continue to grow without  boxes of money sitting on your shelves.

The results can be staggering.  Inventory “turns” is a measure of a company’s annual sales divided by its average inventory.  In industrial companies, ten (10) inventory “turns” is fairly standard. So for a business that generates $30 million in revenue, inventory at any given time will approximate $3 million.  But what if you could move your business to “just-in’time” fulfillment?  World-class companies can operate as efficiently as 50 “turns” (or, put differently, with 1 week of inventory on hand).  If the business in our example could move from 10 to 50 turns, it’s inventory on hand at any given time would move from $3 million to $600,000.  That’s $2.4 million in cash that is no longer tied up in raw materials or finished goods that could be returned to shareholders, used to pay down debt, purchase additional equipment, or expand your factory.  If you don’t migrate your business to more efficient inventory management before a sale, that $2.4 million will belong to your buyer – because you’ve not proven that you can manage your business with less inventory investment.

In our example, the $30 million industrials company likely generates 15% EBITDA margin (or $4.5 million).  If we assume that the business is sold for 5x its $4.5 million in EBITDA, or $22.5 million, poor inventory management means that the sellers have sacrificed 11% of their return (because they left $2.4 million in excess inventory in the business.

We can show you how to manage your inventory more efficiently.  We can show you how to negotiate with your customers and your suppliers to ensure that your cash isn’t tied up on your shelves gathering dust.  But in order to convince an acquirer that your business can run more efficiently, we need to begin this effort 6-12 months (or more) ahead of a potential sale.

 

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Ben C. Paramore

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Ben is a forward–thinking, strategic financial leader with an operations perspective who has built a 30+ year track record of success combining financial and business operations acumen. He has a history of building successful finance departments by leveraging strong leadership and relationship skills. Ben is a versatile business leader with a passion for developing people and taking companies to the next level. He is as much a people-person as a numbers-person and a lifetime  learner who strives for continuous improvement. Standout characteristics include  the following.  

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Joe DeMartino

Machining Executive

C-level Executive and author, Joe DeMartino has more than 30 years of experience in the Aerospace & Defense and Building Material Supply industries. He is currently CEO of Precision Holdings, LLC and has served in other executive leadership roles as COO, President, or EVP with such companies as Barnes Aerospace, GKN, and LMI Aerospace as well as managed a successful consulting practice for the past 7 years. Highlighting his record of transformational management include leading diversification and significant global growth at 5 companies, bringing a high-tech business from start-up to maturity, driving multiple M&A ventures, directing major integration and rationalization of acquired businesses, and orchestrating 2 successful turnarounds as well as holding Board positions with 2 organizations.

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Growth and Scaling:  Joe is currently leading a major strategic turn-around of a private equity owned business, pivoting to aerospace, maintaining market diversity and has grown substantial backlog in the past 2 years. He catapulted a divisions of a Tier 1 supplier  from $5M to $50M business in <6 years with >23% EBIT, leveraging cutting-edge composites and an innovative, high-tech strategy to capture a long-term sole source agreement on Lockheed Martin’s F-35 program (F135 engine). He developed the business case, secured investment commitment, and penned a partnering deal with Northrop Grumman on the B-21 Strike Bomber program. He effectively positioned LMI, through strategic and operational improvements, to substantially grow revenue at 10+% CAGR and help ready the business for sale.

Innovation:  At GKN Aerospace, Joe developed and led incubation through high-rate production of first-time “smart” composite components and assemblies, critical on the F135 engine application. This resulted in a long term, sole source 9-figure contract. At DOW-UT, he designed, developed, and managed the first composite rotating fan platform for Pratt & Whitney and GE commercial engines. This IP-rich application led to a high-margin annuity generating millions of dollars of revenue over >25 years.

Turnaround:  Hired to turn around LMI following the Valent acquisition, Joe transformed operations and positioned the company for double-digit growth. In 2 years, he implemented a Center of Excellence-based organization and optimized operations, realizing >$9.5M YOY cost savings. He achieved wrap rate improvement of 5 to 30% by streamlining operations and closing 5 facilities while expanding a machining facility and the Mexico operation. A major cost reduction initiative resulted in substantially improving working capital, reducing inventory by >10%, improving free cash flow, reducing debt ratio (8.0 to 5.5), and slashing costs by >$17M.

 

 

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Rick Bloom

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Rick is currently a director and Chief Executive Officer of WestMountain Gold, Inc, a publicly traded precious metals exploration company overseeing the Terra Project in a remote part of Alaska.  He was most recently the President, CEO and CFO of Support.com, Inc., a publicly traded leader in outsourced call center and direct-to-consumer tech support services business and continues to serve as a director.  

Previously, Rick served as Executive Chairman of Arcata LLC, a web-based marketing execution services company, and was President and Chief Operating Officer of Renaissance Acquisition Corporation, a publicly traded special purpose acquisition company.  Rick also served as Chief Executive Officer and Vice Chairman of Caswell Massey, a branded personal care consumer product company with an online and catalog division as well as retail stores throughout the country.  Prior to that, Rick was President, CEO, and COO of Marietta Corporation, a maker and marketer of personal care and household products for the country’s largest consumer product companies with production facilities throughout the country.   

Rick is currently a director on the advisory board of and operationally active with PakLab, a Southern California based contract manufacturer of prestige personal care products. For over a decade, Rick has also been a director of NexCore Group, LLC, a national healthcare real estate developer, operator and property manager.  Rick served as a director of Glide Rite Corporation, a national field-service operator that provides equipment repair and maintenance services to the country’s largest retailers.  He also served on the board of AmeriQual Group, the nation’s largest producer of meals ready-to-eat for the United States military and was a Founder, director and Managing Director of Imperial Capital, a successful Beverly Hills based, full-service investment banking firm focused on raising capital, research, sales and trading and asset management.  Rick was also the developer, a director and President of Mountain City Casino Hotel, at the time, the largest casino hotel in Colorado.  Prior to that Rick worked for investment banks Dabney/Resnick and Donaldson, Lufkin & Jeanrette (DLJ).

Rick earned a BS summa cum laude in Economic Science from The Wharton School, University of Pennsylvania.

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Bill Carley

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Held mid to senior-level sales and marketing positions with Anheuser-Busch, Nestle North America, Marietta Corporation, Mountain Valley Spring Water, Veri-Soda, Rao’s, and DE Nigris. Been instrumental in reducing operating costs, improving sales efficiencies, consolidating unprofitable channels, and making significant contributions to revenue growth and profitability. Spearheaded numerous customers’ teams to enhance long term business relationships.

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Twenty five years of M&A and most recently co-founded medical device manufacturer Westfall Technik, Inc.

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Commercial expert in packaging and industrial operations, Kevin is the former President & Managing Director of Bilcare Research inc. and EVP Sales at Mold-Rite Plastics.