Working Capital Adjustment Merger Agreement

At the time of negotiating the term sheet, the parties may have very different ideas about the appropriate amount of working capital for the company. A potential buyer in the start-up phase of a business can imagine working with relatively high working capital to take advantage of growth opportunities, while the seller may have operated the same business with a tight “working capital” budget. In other words, the buyer may view the “normal course” of the business as a growth trajectory (with the regular investment associated with it), while the seller may view it as a path to stability (where investments in growth are exceptional and rely on funds outside the scope of “working capital”). Each party will want to ensure that the agreement adequately reflects its understanding of the term “regular rate” in relation to the target transaction. An arbitrator may be more appropriate in cases where consideration of matters that go beyond purely accounting matters, including questions of contract interpretation, may be required. The case of Alliant Techsystems discussed below shows how important it is to define the types of questions an expert could answer (who, in this case, as is typical, was an accountant). At a slightly higher level, when an agreement does not clearly distinguish between the types of disputes to be resolved by a third party (whether an arbitrator or expert) and those to be decided in court, significant disagreements can arise. As shown by Alliant Techsystems and the NOV Enerflow decision (also discussed below), this type of disagreement can be particularly difficult to resolve when alternative resolution proceedings have radically different compensation consequences. Typical post-closing adjustment provisions focus on the target company`s liabilities and assets that fluctuate due to business activity between the time the parties agree on a purchase price and the actual closing of the transaction, which may be months after the initial price agreement.

The most common adjustments are based on the difference between the actual net working capital (NOC) of the target at closing and an agreed target amount expected at closing. A buyer of a private company typically bases its offer price on the enterprise value of the business on a cashless and debt-free basis, “assuming normal working capital.” This “normal” level of working capital (usually the average working capital required to generate EBITDA, which served as the basis for enterprise value in the buyer`s offer, or sometimes the working capital that should be present at the time of closing) will be a point of negotiation and essentially an element of the total purchase price. The amount determined as “normal” is often a fixed amount included in an SPA as “target working capital” and the seller pays the buyer if the working capital delivered at closing is less than this target amount, while the buyer pays the seller additional consideration to the extent that the working capital at closing exceeds the target working capital. The inconsistency between the final working capital and the target amount leads to a significant reduction in the purchase price Conclusion The net amount of working capital offers benefits to both the buyer and seller of a merger and acquisition. However, sometimes it is not properly taken into account. Doida Law Group has experience in negotiating all parts of M&A transactions, including targeted working capital and any adjustments. Fee security is something we offer our customers through our unique billing structure. If you have any further questions about getting started with us, call 720.306.1001 to get in touch with a member of our team today. The main purpose of an NWC adjustment is to protect the buyer from fluctuations in working capital between the time a purchase price for the target transaction is agreed and closing.

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