Net Working Capital Peg?

by a searcher from Gonzaga University

1 year ago

In past transactions I have found that it is standard practice to include a Net Working Capital Peg in the LOI and PSA to cover off the transfer of net working capital to a buyer.  Recently we have had a lawyer push back on this being standard practice.  I would be curious if others have found this to be standard practice or out of the norm?  Also if anyone has seen a survey or white paper that talks to NWC construct in lower middle market transactions I would love to read it!

3 likes
264 views
19 comments

intermediary from Naval Postgraduate School

I concur with Stephen. Seller's attorney may not be fully tuned in to common M<&A practice. Watch out for additional attorney fees on your side to overcome a possible deficit on the seller's side.

2 months ago | like reply | 0 likes

intermediary from City University of New York (CUNY) System

Doing this for over 20 years, and dealing with very educated attorneys, and sometimes even accountants who don't deal with this, the level of understanding of what NWC is, and the agreement of its calculus and inclusion into a transaction is nowhere as high as I believe it should be. By standard, any reasonable middle market transaction should have a NWC provision, as well as framework for determination of the PEG. Understanding how to review and determine a real NWC is different in many companies and is a must for any reasonable sized transaction. The attorney who doesn't think this is standard, will be a big problem in getting to closing. It could cause a rejection at the lender if it cant pass underwriting especially if the lender cant make up the required WC as part of their own revolver loan.

1 year ago | like reply | 3 likes

More on Searchfunder

Just Closed on My First Deal! Reflections and Takeaways for other Searchers

45,152 transactions are available on Searchfunder (now searchable by keyword)

Now everyone has unlimited IBISWorld access

Family office looking for traditional searchers

Examples of self-funded searcher websites

Investor seeking Self-Funded Search Deals

What are market terms for Seller Notes?

2 Best Ways To Find Motivated Sellers, Off-Market Deals

Searchfunder is an online community and toolkit for searchfunds. Over 80% of those involved in searchfunds maintain a Searchfunder.com account to help them network, problem solve challenges, and keep up with the industry.

We maintain partnerships with database providers that make searching more effective, efficient and affordable along with features that help searchers find deals and investors and vice versa.