Net Working Capital Peg?
December 14, 2022
by a searcher from Gonzaga University in Denver, CO, USA
In past transactions I have found that it is standard practice to include a Net Working Capital Peg in the LOI and PSA to cover off the transfer of net working capital to a buyer. Recently we have had a lawyer push back on this being standard practice. I would be curious if others have found this to be standard practice or out of the norm? Also if anyone has seen a survey or white paper that talks to NWC construct in lower middle market transactions I would love to read it!
from The University of Chicago in Chicago, IL, USA
I have taught WC to M&A folks for 15+ years. Recently I was asked to fix a $40 M value deal that had broken apart 3 times only due to WC (Buyer represented by one of the Big 4.; Seller by a mid-size accounting firm known for M&A).
I recommend including WC in LOI. However, one must first understand the reasons, rather than saying it is a standard practice. M&A WC is different than Accounting WC in many ways.
In another transaction, the buyer was a $600 M platform owned by a PE firm. My seller was less than 10% in size. The PE firm's attorney insisted that that they have never done a deal with WC included in LOI. I said, neither have I allowed an LOI to be signed w/o WC. They understood my reasoning and agreed. But they happen to have one unique situation for excluding WC in the LOI. I found a way to accommodate them and agreed to exclude WC in the LOI but essentially achieved as-if WC was in LOI to protect the buyer, the seller and the deal itself. Happy to talk.
Stephanie Giffin, thanks for mentioning.
from Wake Forest University in Winston-Salem, NC, USA