I see this issue on 99% of deals in the lower and middle markets. and it almost always creates tension.

It usually comes towards the end of a deal. It usually is the biggest point of contention.

I've seen it kill many a deal.

I am of course talking about the negotiation of the Net Working Capital (NWC) peg.

In short, the NWC peg is the amount of NWC:

  1. 1) Needed to run the business without any disruption to ops.
  2. 2) The buyer assumes they are receiving at close as part of their offer.

The peg is under the microscope.

Why? Because every dollar directly changes the effective purchase price.

If the Buyer is experienced, they probably put an NWC peg methodology in the LOI. But this is still usually disputed.

Using a methodology like the "last twelve months avg." in an LOI is a good start. In fact, I recommend something like this.

But just like reported EBITDA, reported NWC doesn't tell the whole story We need to include adjustments to get to the true go-forward view. So these adjustments need to be negotiated post-LOI. Plus, diligence may change the buyer's perspective.

And the fun doesn't stop even after this hurdle during diligence. After the close date, the calculation is performed again. Specifics are often negotiated even after the calculation method is detailed in the Purchase Agreement.

My advice?

  1. 1) Be transparent.
  2. 2) Get ahead of the conversation
  3. 3) Understand NWC like the back of your hand.
  4. 4) Put detailed definitions in the Purchase Agreement

This topic alone usually pays for my fee on a deal – I help buyers and sellers align on the calculation. And help my client negotiate this successfully Without adding tension to the deal (the hardest part)

What has your experience been with these key negotiations?