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Series: Working Capital in Merger & Acquisition Transactions

An Expert View


John C. Simons Partner

Summary of a Four-part Series of Articles on Working Capital in Merger & Acquisition Transactions.

An expert view on how it works and what you can do to protect your interests through an M&A transaction process.

This series of articles is intended for Sellers and Buyers of businesses, as well as for professionals who are assisting in the transaction process. A huge amount of effort and anxiety is expended to manage this aspect of a transaction – some that is appropriate and some that is a consequence of poor planning and transaction management. Through these articles, we will help the reader sort through a great many issues and to think ahead to minimize risks and disruption.

The premise of a working capital covenant (or promise) and the related adjustment mechanism in the purchase agreement is that the Seller is selling the business with a normalized level of working capital in the business – so that the Buyer, who knows less about the business, will not be surprised to have to invest further in the immediate term to operate the business.

Transaction Stages

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Letter of Intent Stage

Agree that WC included in deal. Agree on LTM* or other Method for determining the “Target” Scope, Measurement and other special circumstances. (*Last Twelve Months)

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Due Diligence Stage

Set Working Capital “Target” or “PEG”.

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Closing Stage

WC estimated for Closing calculations. (Estimated vs. Target)

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Post Closing Stage

Within 60-120 days of Closing, WC Reconcilliation Process. (Actual Received vs.Target)

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Settlement Stage

After Agreement on Reconciliation, $ Settled between Parties.

The covenant that exists requires reaching agreement on a “Target” level of working capital to be conveyed along with the business, an agreement on what constitutes working capital & how it is calculated and a description of the post-closing reconciliation process – which typically results in a post-closing purchase price adjustment. There are pitfalls in the process that can trip-up the best-intentioned.




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ADDRESS

10 East 40th Street
Suite 3210
New York, NY 10016

CONTACT

Phone: 212.260.2743
Fax: 212.260.2748