How Much Working Capital Does a PropTech Startup Need in an Acquisition?

Working Capital Requirements: Overview for PropTech Startups

The amount of working capital a PropTech startup needs in an acquisition depends on several factors, including the deal structure, the startup’s financial health, and the acquirer’s expectations. Here’s how to approach it:

1. Understanding Working Capital in an Acquisition

• Definition: Working capital = Current Assets - Current Liabilities (typically cash, accounts receivable, and other short-term assets minus short-term liabilities like payables and accrued expenses).
• Buyers often want the company to have enough working capital at closing to operate smoothly without requiring immediate additional funding.
• The buyer might establish a working capital target (peg), which is the agreed-upon level of working capital that must be delivered at closing.

2. Typical Working Capital Targets in SaaS and PropTech Deals

• Revenue Model Matters:
  • If your startup operates on a prepaid subscription model (common in SaaS), you might have a negative working capital structure where customers pay in advance, reducing your need for excess cash.
  • If you rely on pay-as-you-go pricing or large enterprise deals with long sales cycles, you may need a higher working capital reserve to cover operations.
• Many buyers set a target working capital of 1 to 3 months of operating expenses, especially if cash flow isn’t consistently positive.
• Some PropTech SaaS startups operate with minimal working capital (~5-10% of annual revenue) due to low receivables and prepaid contracts.

3. Key Factors Influencing the Required Working Capital

• Buyer’s Expectations & Structure of the Deal
  • Strategic Acquirers (e.g., RealPage, Yardi, CoStar) might want enough working capital to cover 30-90 days of operations.
  • Private Equity Buyers may demand a higher working capital buffer, especially if they use leverage.
  • All-cash deals may allow more flexibility, while earnout structures might require a buffer.
• Deferred Revenue
  • If customers prepay for services (e.g., annual SaaS contracts), buyers often expect the corresponding cash to stay in the company at closing.
• Debt & Liabilities
  • Short-term liabilities like accrued expenses, accounts payable, and deferred revenue obligations factor into the working capital calculation.
• Runway & Burn Rate
  • If the startup is burning cash, buyers may require enough working capital to last until breakeven or a major growth milestone.

4. Negotiating Working Capital in an Acquisition

• If your startup is profitable and cash flow positive, you might negotiate for a lower working capital requirement at closing.
• If your startup is growing fast but burning cash, the buyer may insist on a larger cushion.
• Excluding Cash from Working Capital: Some deals allow you to exclude excess cash from the working capital peg so founders can take it as a dividend before closing.
• Earnouts & Holdbacks: If there’s an earnout, some acquirers might reduce the upfront working capital requirement and adjust over time.

5. Rule of Thumb for PropTech Startups

• Low-burn SaaS startup with prepaid contracts: 0.5 to 1x monthly operating expenses.
• Enterprise-focused startup with large receivables: 1 to 2x monthly operating expenses.
• Marketplace or transactional PropTech (e.g., real estate listing platforms with ad revenue): 2 to 3x monthly operating expenses.

Final Thoughts

• Work with an M&A advisor to define a reasonable working capital target.
• Review historical working capital levels (last 12-18 months) to find a fair baseline.
• Negotiate exclusions (e.g., excess cash, certain liabilities).
• Plan for post-acquisition integration to determine if additional capital will be needed for growth.