Thoughts on a fair working capital ratio for APA

following

1. I have taught WC for 15+ years for M&A deals to I-bankers, CPAs, attorneys, PEGs etc. I also consult on WC when deals fall apart. At IBBA we are working for a series of courses on WC for brokers.
2. I have never run into WCR in my 35 years of M&A. It is the worst approach one can take. Seller can easily screw the buyer. Seller will be at a serious disadvantage if AP shoots up. WCP (WC peg) is the correct approach.
3. M&A WC definition (i.e. transaction WC) is different than accounting definition of WC. For M&A, WC, in simplest form, is AR + Inv-AP. (the primary components). It excludes cash, but not always. It excludes debt bit not debt-type. And there are exceptions to the 3 primary components as to whether all AR, Inv and AP are included. Also, one needs to address Accrued liabilities; this depends on what is accrued and the inventory costing system.
4. Establishing WC Target (aka WCP) is for the protection of both the buyer and the seller. WC Target removes seller motivations to manage WC, it protects seller for payment delays, and it assures seller gets all the profit till the date of closing.
5. Once you define WC, the common approach for WC Target is TTM average. The duration is shorter for growth or longer in certain situations. Seasonality is more complex, but TTM works in most seasonal situation.
6. Buyer DOES NOT get "additional" WC for a growing business. Buyer has to fund the growth. However, from a lender perspective, buyer needs a facility in place to fund growing WC.
7. There are other factors like accounting policy, cut-offs, sales distribution during the month, etc.