Net Working Capital

November 11, 2024

by a searcher from Babson College - F.W. Olin Graduate School in Syracuse, NY, USA

I'm working on a transaction where I'm receiving different opinions on how to calculate Net Working Capital. The company accrues year-end bonuses in December and pays them in March, so NWC is 20% less in Dec, Jan, and Feb, which weighs down the TTM average. My CPA is telling me I shouldn't be including the year-end bonus accrual in the calculation because it should not be viewed as a current liability.

There's a $100k difference in what the seller owes me for the NWC calculation when I include it versus excluding it. I haven't been able to find anything online arguing one side versus the other, so if someone has something they can send me, please include it in your comment. Thanks!

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

Do you have a definition of NWC in your LOI or your purchase agreement? Ideally the definition would specifically include items such as bonuses which you may disagree on to avoid having the discussion of whether a line item is a current asset or liability or should be included. But generally, if the bonus obligation is already accrued and it relates to the employee performance period before closing then you certainly want the seller to pay for it. It's not so much an accounting question as a deal point to work out with the seller. One way to look at it is if the employees were terminated at closing, would they be entitled to the bonus?

Reply by a searcher
from Harvard University in Salt Lake City, UT, USA

Most favorable to you would be to exclude the bonus accrual from NWC and list it as an indebtedness item. Argument would be that the Seller isn't accruing for the bonus all year long (which they should be under GAAP) but would be responsible for the portion of the year in which they own the business. For example, if you transact in February the Seller should pay 100% of the 2023 bonus and two months worth of the expected 2024 bonus. I would calculate that amount and list it on the indebtedness schedule.

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