The selling and buying of a business in northern San Diego is not as simple as buying a pair of shoes at the store. There is more to it than swiping a credit card or writing a check. A business is composed of multiple elements such as assets, profits, staff, property, equipment, etc. Therefore, when a business is sold, ownership of more than a name and flagship is transferred to a new person. As someone who might be interested in purchasing a pre-existing business in the San Diego area, it is important to understand what happens to Working Capital.
What is Working Capital?
When a business is sold, a seller transfers all tangible and intangible assets to the buyer. Working Capital, for example, is a large part of the business’s assets – considered the lifeblood that allows a business to operate. Whether a sales transaction is an asset or stock sale, working capital needs to be considered. The amount and whether it is included in the transaction is negotiable
The true definition of Working Capital is ‘current assets minus current liabilities.’ In other words, it refers to the cash conversion cycle for inventory, accounts receivable, and accounts payable. For example, a business needs to buy inventory. When that inventory is sold, it becomes accounts receivable. As the company collects its accounts receivable it uses the proceeds to pay operating expenses.
Working Capital is vital for any business to continue to function. It is important to know what Working Capital needs will be, whether they are included in the purchase price or will be provided by the buyer post closing. The business owner will need to have an intimate understanding of how much is absolutely necessary to keep operations running smoothly during the transition of ownership. Beyond that, the business owner can take home a profit from the sale.
There is a lot to unpack with the sale of any San Diego business no matter how large or small it is, and that is why Transworld Business Advisors San Diego North always recommends working with an experienced and knowledgeable business broker. Ideally, the business broker selected will be local and have intimate knowledge of the community and those in it. With a vast knowledge of business sales from both the seller and buyer perspective, business brokers are an invaluable resource.
If you have questions about buying or selling a business in San Diego County or need some advice, please contact your local San Diego business advisors at Transworld San Diego North to find your next best business asset.
