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Advisors to the Recruitment Industry


Net Working Capital


When discussing Business Value there is a fascination with the “profit multiple” calculation. The value of working capital demands equal attention, discussion and clarity.

Both buyers and sellers benefit from a focus on working capital, and what is to be done with that working capital, during a transaction.  

Well advised purchasers expect that when they pay the value derived by applying the multiple to the maintainable earnings, they are paying for all the assets required to run the business. These assets include Plant, Property & Equipment (PP&E), Staff, Customer Contracts, Intangible assets such as the Customer and Contractor databases, and sufficient Working Capital to run the business. 

Amidst light-hearted jests, it's commonly remarked that recruitment agencies possess few tangible "assets," and their primary value lies in the dedicated personnel who leave the premises each day.  

It is true that recruitment agencies typically do not allocate substantial resources towards Fixed Assets such as Property, Plant, and Equipment (PP&E). Nevertheless, the focal point shifts to their current assets, encompassing cash reserves, outstanding client payments, prepayments, as well as their immediate obligations, including debts, amounts owed to staff and suppliers, tax responsibilities, and provisions for employee benefits like holidays and long service entitlements.  

These factors collectively hold significant weight in the assessment of any agency's financial standing and operational prowess. 

In most cases, if you provide temp and contract services then you will have a constantly changing and complex balance sheet that reflects both the obligations outlined above together with your cash and amounts owed by clients. This is then made more complex by the manner in which you fund this working capital – self funded, business overdraft, or some form of debtor financing. 

The big issue for small and medium recruitment agencies is what happens to the working capital when the business is sold. The value of the working capital can vary from a small (or even negative) amount to many millions of dollars in value. 

Net working capital (NWC) is generally defined as current assets minus current liabilities. 

The Net Working Capital (NWC) frequently fluctuates within a financial year, often prompting the calculation of its annual average. This average then becomes the anticipated NWC benchmark for the acquiring party. During the transaction's finalisation, any surplus beyond this target adds to the purchase price, while any deficit reduces it.  

Drafting NWC adjustments requires a thorough comprehension of the target company's balance sheet and its evolution over time. Variations can occur based on the scope of items included in a sale and if the transaction is an asset (business) sale or a share sale.  

In most instances, the seller retains the essential operational working capital within the business, resulting in only excess working capital being withdrawn by the seller. 

Purchase Price Adjustments 

Sale agreements for private companies commonly incorporate provisions for adjusting the purchase price based on NWC.  

Even small companies should seek guidance on structuring their balance sheets to address NWC and non-core assets or liabilities in sale transactions. This effort upfront reduces disputes. 

HHMC Global operates within the staffing and recruitment industry on equity transactions, market valuations and business growth advisory. Contact us to discuss further.

eBook - Business Valuations in the Recruitment Industry

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Tags: Working Capital, Business Value, Recruitment and Staffing Industry

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Rod Hore

Rod is a 35-year veteran of Australian and international IT and corporate advisory organisations. His executive-level credentials traverse many segments of the staffing and recruitment industry and include corporate advisory assignments, mergers and acquisitions mandates, and C-level advisory to multinational and other public and private organizations. Located in Perth, Rod founded HHMC to provide local industry acumen and global knowledge to Asia Pacific recruitment agencies. HHMC’s innovative business strategies and well-grounded guidance result in clients realising their personal and corporate goals.

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