Negotiating on NWC

A common practice is to do a quick estimate of working capital from 1/12 of the revenue, then once the LOI is accepted during due diligence you can peg the working capital number with the seller, but let the seller know that its going to take some time to verify the working capital, especially if you are collecting receivables. If the NWC is below what was agreed, then you would deduct the deficit from the amount owed to the seller (from the seller note, or some money that is sitting in an escrow account)

Agree with all the above. I realize you're negotiating an LOI and not a purchase agreement, but one forms the basis for the other, and it sounds like there is confusion around the working capital component of the purchase price. A detailed definition of the components of NWC is key, as is a definition of cash and indebtedness or debt-like items that will be treated as indebtedness. One way to accomplish this is to take the current/historical balance sheet, and specify which line items are included or excluded from a NWC calculation. Come to negotiated agreement on that and agree that there will be a post-closing true-up. It often makes sense to also have seller present its calculation of NWC at closing (with our without a closing true-up, but at minimum serving the purpose of confirming at closing that seller and buyer are playing by the negotiated rules.) Include a schedule in the closing documents that presents the company's closing balance sheet annotated for what is included or excluded in the NWC calculation, and ideally the rationale for why if there might be uncertainty. Of course, all this and more, such as a dispute resolution mechanism, needs to be documented accordingly in the purchase agreement.