Net Working Capital Adjustments in M&A Deals: The Buyer’s Perspective

Working capital is an important measure of a company’s liquidity. In the acquisition of a business, if the target’s closing working capital is not sufficient for ordinary course operations, the Buyer may be required to raise additional capital to fund the shortfall; an outcome that could have significant financial cost to the Buyer and possibly prevent the Buyer from closing the deal if additional financing is unavailable on acceptable terms. To address this issue, agreements with respect to the purchase of privately owned companies typically include a purchase price adjustment based on the difference between actual closing net working capital and an agreed level of net working capital.

This article, co-authored by Loeb & Loeb partner Barry T. Mehlman, examines how the net working capital adjustment should work from the Buyer’s perspective and outlines recommendations that the Buyer should consider to ensure that it receives the amount of net working capital it requires to operate the target’s business after closing.

This article was co-authored by Gary Levin, Daniel Zielke and Elene Karanicolas. Elene Karanicolas and Daniel Zielke are directors and Gary Levin is a partner in Deloitte Financial Advisory Services LLP.