Deal Notes - Registered Logo

Working Capital Efficiency

In the middle market of the aerospace and defense industry, virtually all purchasers of businesses will perform Discounted Cash Flow (DCF) analyses when developing their bid prices. Over the past 22 years, we have found that a key element of the DCF is projected changes in Working Capital (WC) in future years.

Anticipated reductions in WC drives DCF’s up, forecasted increases in WC requirements drive them down.  For sellers, it is important to properly position this WC issue in communications such as the Confidential Information Memorandum (CIM) and responses to buyer Due Diligence (DD); you want to be factual and forthcoming while highlighting opportunities for improvement.

In the realm of middle market aerospace and defense mergers and acquisitions, 3 components of WC usually have the greatest impact on buyers’ DCF’s:

Accounts Receivable

  • Has the company enforced its payment terms in the past? Will they in the future?
  • Have certain customers historically been given more favorable (longer terms?
  • Do the terms match industry standards? Are industry standard terms changing?
  • Has the company adequately reserved for Bad Debt in years past?

Accounts Payable

  • Has the company historically paid within terms? If not, why – cash flow pressures?
  • Have any vendors put the company on cash in advance?
  • Are vendors’ terms consistent with industry standards?


  • Has the company optimized its inventory practices (Just-in-Time, Kanban, min/max, work-in-process flow time reductions, etc.)?
  • Have new product introductions affected inventory levels?
  • Has the company adequately reserved for excess or obsolete inventory?

By optimally communicating historical an project WC details to prospective buyers, sellers can favorably impact buyer pricing. If you want to learn more, I would be glad to discuss with you; my number is below.

Have a great day everyone.

Kevin Gould
Managing Director, Aerospace