Working Capital Target Flashcards
• What is working capital?
o Current assets – current liabilities (excluding cash and interest bearing items)
• Why is deferred revenue interesting when talking about working capital?
o Seller has received the cash but buyer will still need to service such customers
• What is the very basic way of calculating working capital target?
o Average net working capital over the last 12 months
• How is it calculated in practice?
o 1. Define all components of working capital. Debate between parties
o 2. Use a trailing 12m average or project (if seasonal) over a year or two to come to a dollar amount
o 3. Negotiate with seller for adjustments
• What does the buyer want when calculating working capital delivered?
o Wants it to be as high as possible.
• What does the seller want when calculating working capital delivered?
o Wants it to be as low as possible.
• What is the logic behind the working capital adjustment?
o If target is 5 and seller delivers 7, buyer owes seller 2 (Purchase price increases) and vice versa if seller delivers 3
• What happens with working capital when a deal closes?
o A day or two before close, an estimate of final working capital is provided to buyer which will impact purchase price + or minus
o Then within a quarter post close, a true up process will occur if working capital was over or under delivered
• What is the real proceed equation that the sellers get?
o Headline Price – Debt + Cash – Transaction Expenses +/- working capital differentials
• What is a locked box mechanism?
o Buy a company on a prior bs and control activity through contractual provisions up until closing.
o Sellers preferred selling mechanism. Avoids the need for completion account mechanism. Prevents adjustment.
o Working capital target is fixed
• What do we mean when we say deliver working capital?
o The current assets and liabilities (minus cash and debt items) left on balance sheet at close.
