Working Capital Adjustments in M&A

In such a challenging M&A environment, a core priority for both buyers and sellers should be to head off the potential for disputes that could derail a deal. With much of the negotiating focus centred around the headline price, working capital adjustments are often ignored until the final furlong.

Working capital - the short term funds needed to keep a business running - is a critical issue during M&A. Buyers need it to ensure they can step into a functioning business without immediately injecting their own money, while sellers want to ensure they don’t leave an excess amount of their hard-earned cash in the business once they leave.

Clearly, herein lies considerable scope for disagreements. This is where working capital adjustments step in. A simple tool designed to adjust the purchase price up or down depending on whether actual working capital on closing exceeds or fails to meet a pre-agreed target. However, this process can also be wrought with disputes.

Despite the critical and sensitive nature of working capital discussions, though, it is an area that often receives less attention during negotiations than factors such as earnings, cash flow and assets. In order to limit M&A disputes, this is something that needs to change.

Check out our exclusive insight for a detailed look at working capital adjustments in M&A, including:

- The structure of a working capital adjustment
- The competing priorities of buyers and sellers
- Common disputes and how to handle them

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