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  • How do I account for working capital fluctuation in a discounted cash flow valuation?

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    Working on valuing a business with big variations in working capital during the year, so how do I deal with the possibility that the transaction closes at a time when working capital is very low? It seems that using the discounted cash flow method for valuation is essentially assuming an average working capital figure at the time of the transaction (which in this case is highly unlikely).

    business-valuation working-capital

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    by caseyb1

  • Answers

  • answered , updated

    by ryan79

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    This is not so much a valuation problem as a question of how to structure the transaction. Any adjustment you make to valuation to account for timing issues with working capital will just create a slightly different problem rather than solving anything. The best approach to volatile working capital is to include a working capital adjustment to purchase price in the terms of the transaction. That way, you can determine a reasonable working capital level for the business and agree to an adjustment mechanism for either the buyer or seller to get compensated for insufficient or excess working capital at the time of the transaction.

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