Net Working Capital Peg?

by a searcher from Gonzaga University

11 months 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!

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18 comments

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.

11 months ago | like reply | 2 likes

intermediary from University of Victoria - Peter B. Gustavson School of Business

I found this whitepaper on WC very helpful: https://acrobat.adobe.com/link/review?uri=urn:aaid:scds:US:382c9431-45df-313a-b021-3a80d94f1579

11 months ago | like reply | 2 likes

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