By Ryan Murphy, Managing Director, Transaction Advisory Services
Working capital can be one of the most misunderstood and contested elements of an M&A transaction. Establishing the right working capital target ensures that both buyer and seller are aligned on what constitutes a “normal” level of liquidity at closing.
What is Working Capital in an M&A Context?
Working capital typically equals current assets, such as receivables and inventory, minus current liabilities, such as payables and accrued expenses. In a sale, the buyer expects the business to be delivered with sufficient working capital to operate normally from day one.
Why is the Target So Important?
If the working capital amount at closing falls short of the agreed-upon target, the purchase price is typically adjusted downward. Conversely, excess working capital can result in a price increase for the seller. Getting this number right avoids disputes and ensures a fair transaction.
Why is the Target So Important?
LCG analyzes historical trends, seasonality, and operational cycles to establish an equitable target. Our team ensures the calculation reflects business realities and aligns with the economic intent of the deal.
Conclusion
Understanding working capital dynamics prevents surprises post-closing and builds trust between parties. With expert guidance, sellers can protect value and ensure a smooth transition.
For guidance on working capital analysis in transactions, contact Ryan Murphy at [email protected].