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


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)


Due Diligence Stage

Set Working Capital “Target” or “PEG”.


Closing Stage

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


Post Closing Stage

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


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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