Net Working Capital: A Negotiated Target

In addition to the future earnings of a business, mergers and acquisitions require the delivery of the ordinary and necessary balance sheet of the business to the buyer. The balance sheet should be adequate for the continued operation of the business and exclude cash and long-term debt. Due to the varying nature of the balance sheet, sensible targets for cash (if any), net working capital, and net assets are standard.

Net working capital, or current assets minus current liabilities, tends to be the most vague and contentious balance sheet target. With significant fluctuations in cash, receivables, and payables from negotiation to close and varying definitions of the term, net working capital targets may require further negotiation between parties. Approaches to a negotiated target may include:

  • Average working capital for a specified period around the time of negotiations
  • Average working capital for a specified period as a percentage of quarterly or monthly sales
  • Average working capital from comparable companies in the industry

An experienced M&A Team understands the complexities of deal structures and will identify and resolve any potential issues early in the transaction process.