NWC combined w/ rolled equity

by a searcher

1 year ago

When doing a 100% LBO, we use the following terminology in our LOI for NWC - "The Purchase Price will be adjusted up or down to the extent that the Company’s net working capital at closing is greater than or less than a normalized working capital target to be mutually agreed upon in the definitive agreements."  

What terminology should be used in the LOI for NWC when the seller is rolling equity and retaining minority ownership?

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professional from Dartmouth College

Typically the best way to account for this is to have any adjustment downward require a payment by the Seller to the Company, not the buyer, of the shortfall. If there's an adjustment upward the Company, not the Buyer, should pay the excess to the Seller. Idea being that the buyer invested in a company with a specific level of working capital, and any adjustment outcome should get to this place. Purchase price remains the same.

1 year ago | like reply | 1 like

searcher from University of Virginia-Darden - Darden School of Business

You may want to say “the accounts receivable will be X greater than the payable and Y cash must be in the bank account as of the close date.”

1 year ago | like reply | 0 likes

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