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P/NWC>45%: the magic formula from a Swedish HoldCo clan

Industrial acquirers, this one's for you

A couple of weeks ago, I was in London for a business school reunion. 

En route from the BBQ stand to the kids’ face painting corner I bumped into a classmate running a successful beverage business. He had founded the business straight out of b-school and recently sold control to a multinational for a tidy sum. 

He had one piece of wisdom to share with me. 

“What’s the most important thing in a growing business? CASH. Stretch payables and shorten receivables. Manage cash well, and you will keep leverage in check and avoid the unnecessary dilution”. 

I couldn’t have put it better! 

Last week, we wrote about working capital in software. Today, we are going to discuss working capital best practices for industrial businesses such as manufacturing, distribution and B2B services. 

The article is structured as follows:

  1. Why working capital optimisation is so essential to Swedish serial acquirers

  2. How blind focus on accounting profits hurts cash flow

  3. What actions to take at any given level of P/NWC? Practical advice from Momentum Group, a $220M revenue HoldCo (paid subscribers) 

  4. How leading Swedish HoldCos compare on profit growth, margins and working capital efficiency - and why (paid subscribers)

Before we dive in, check out this newsletter’s sponsor: Apollo.io - my favourite sales automation tool. Apollo is intuitive and very affordable.

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Yet another Swedish invention

While no reliable statistics exist, on a per capita basis Sweden must have the highest number of serial acquirers globally. We track 40+ names, ranging from behemoths like Lifco and Indutrade, to relative newcomers like Norva24 and Hasko Invest

If you are new to this topic, and want to understand why Sweden & how these HoldCos operate, we recommend reading this article

Top performing HoldCos share several attributes that have enabled them to compound returns at 20%+ CAGR year in, year out. These include:

  • An uncompromising approach to capital allocation

  • Flawless M&A execution

  • A decentralised structure with a lean HoldCo

  • Simple, profit focused goals that can be understood and influenced by everyone in the organisation

Let’s double click on the fourth bullet. 

A large part of the Swedish HoldCo population traces their lineage to Bergman & Beving. Firms like Lagercrantz, Momentum Group, AddTech, AddLife and of course Bergman & Beving itself.

Their combined market cap is over $10B. 

Source: Bergman & Beving

What these firms share in common is an explicit profit / net working (P/NWC) target, typically in excess of 45%. 

How is this ratio calculated? 

  • Profit” stands for EBITA for the rolling 12-month period divided by 12 months’ average WC

  • NWC” is defined as inventories plus accounts receivable less accounts payable 

Keep inventory and receivables down and stretch payables. Common sense, right? 

Source: AddLife

But why 45%? Why not 20% or 60%?

Let’s find out.

The 45% ratio, deconstructed

Let’s peek inside the Swedish serial acquirers portfolios.

What sort of businesses do we find? 

  • Industries: niche manufacturing, value-add distribution and business services

  • Revenues in the €8-12M range, 10-20% profit margin

  • A typical acquisition target will have 30 employees (which implies revenues per FTE of €300K)

Consider a business with 100 in revenue, 10% profit margin and a P/NWC ratio of 45%. Its NWC is 22. As the company dials down the P/NWC ratio from 45% to, say, 25%, its operating cash flow turns negative (profit of 10 minus NWC delta of 18). Ouch! 

Scenario

A

B

C

Sales

100

100

100

EBITA

10

10

10

P/NWC

25%

45%

60%

NWC

40

22

17

NWC/Sales

40%

22%

17%

Now, consider two additional scenarios:

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