Best Approach for Structuring Working Capital in Acquisitions?

by a searcher

1 month ago

Assume a typical 20:10:70 (Equity, VTB, Senior Debt) acquisition: What’s the optimal approach to structuring Working Capital (Net of AR - AP) and inventory in an acquisition?
Option A: Fold WC into the purchase price, splitting it across equity, a seller note, and senior debt. This requires more equity upfront but retains cash in the business as AR is collected, possibly reducing the need for a large Line of Credit.
Option B: Keep WC separate, financing the share/asset purchase independently, and set up a short-term seller note for WC with potential protections against bad debt. Here, a Line of Credit (margined on AR) could cover WC needs, lowering upfront equity and helping manage bad debt risk.
Are there other commonly used structures? Any approaches banks tend to prefer?

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professional from University of California, Berkeley

though that's mathematically correct.... seller still want their AR. Proper framing, preparation and negotiations will help you reduce drama.

I.. in fact.. just went through this exact same thing on my own deal.

ping me if you need help - --@----.com buy-side Fractional CFOs - serving as your second pair of eyes/brains in the M&A process. https://www.teeupnextgen.com/eta

1 month ago | like reply | 1 like

investor from The University of Chicago - Booth School of Business

In a transaction, the acquirer is not i.) purchasing the business and ii.) separately purchasing NWC. The assets acquired should include all necessary to continue the demonstrated economic performance of the target - and thus, NWC is both an expected and required component of the transaction. As such, it is typically financed within the overall capital structure with many of the concepts articulated by Roman embodied as loan convenants / elements within a commitment from a singular lender. Other considerations to keep in mind - by definition, the transaction should be cash-free, debt-free but that does not prevent an acquirer from stipulating that a certain level of cash needs to be left in the business; it is a matter of negotiation. Also if the target has taken customer deposits, the seller needs to leave cash in the business to the extent that said deposits were not spent on related WIP inventory for the order. The acquirer should expect to receive ownership of all AR but AR > 90 days should be not be valued and AR contract retention should only be valued upon collection with a post-closing pymt to the seller.

1 month ago | like reply | 1 like

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