BULL’S EYE: THE NET WORKING CAPITAL TARGET

In conjunction with the future earnings of a business, merger and acquisition (M&A) deals 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 (the “Enterprise Value”). Due to the variable nature of the balance sheet, sensible targets for cash (if any), net working capital and net assets are customary.

Net working capital, or current assets minus current liabilities, tends to be the most ambiguous and disputed 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 Advisor will identify and resolve potential problematic issues early, especially before the signing of the Letter of Intent.