We have a deal under LOI that is expected to close in December and are at somewhat of an impasse in our NWC target negotiations.
Our QoE report (which used data through to end of September) showed a very consistent level of NWC. However, the sellers claim that in October they availed themselves of longer terms with their vendors, and as a result their payables went up significantly. They are arguing that this represents a "new normal" for the business and that the target should reflect the numbers from October onwards. Obviously this is problematic given that we only have 1.5 months of data to go on (as I'm writing this in mid-November), and the difference between the target using the pre-September and October numbers is very significant (5-10% of the purchase price).
Has anybody encountered this situation before? If so, how have you dealt with it to protect yourselves? Interested in particular in hearing about any clauses or mechanisms in the purchase agreement that could mitigate the risk. (This is an SBA-funded deal, btw. I know sometimes SBA SOPs don't allow certain things that would be acceptable otherwise.)
Setting NWC target after change in terms
by a searcher from Harvard University
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Many good points above around pulling cash out and sticking you with bills.
Depending on the direction you want to take you could speak with lender about playing the bad guy. Get them on the phone with seller to deliver the message that they can not support a change like this and at this point so close to close. The deal was underwritten with a certain level of wc and the bank will not agree to changes.
I am sure you can also find creative ways to solve using time and escrow.