Working capital is a crucial aspect of mergers and acquisition transactions, influencing the total payable consideration. Here’s a short overview of key points regarding normalised working capital.
In an M&A transaction, buyers and sellers agree on an enterprise valuation, typically based on the target’s maintainable EBITDA/earnings.
The enterprise value reflects a cash-free, debt-free valuation, assuming a normal level of working capital sufficient to maintain earnings without liquidity issues.
Determining this “sufficient” level can be complex.
The Heads of Terms usually specify that the purchase price is subject to a ‘normalised level of working capital at completion’ which is established during financial due diligence.
If the actual net working capital at completion exceeds the target, the buyer pays the seller more, increasing the purchase price, and vice versa.
This target protects both parties from unusual working capital movements or trends before completion.
Calculating normalised working capital involves negotiations and assessment during financial due diligence. There is no standard definition, making it a key negotiation point. The process usually includes:
Post-transaction, completion accounts determine the actual completion cash, debt, and net working capital, compared to the target set pre completion. Any difference adjusts the purchase price upwards or downwards.
An advisors assessment is therefore essential to set and agree an appropriate and accurate target to avoid large variances in the overall consideration.
Here at Gravitate we assist buyers and sellers through this process to safely navigate you through this process.
To speak to one of our dedicated team at Gravitate Corporate Finance click here!
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