WORKING CAPITAL - BEWARE THE PEG

Searchers - beware the working capital peg. The peg is meant to ensure an appropriate amount of fuel is delivered to take over the business in the normal course of business. It also ensures the seller continues to operate the business in the normal course through close. However, there are a ton of pitfalls - seasonality, non-operational current assets/liabilities, deferred revenue, etc and this in reality can affect your ultimate purchase price and indirectly your valuation.

I obviously recommend setting a peg in the purchase agreement but there are different ways to calculate it and to work together with a cooperative seller to ensure it meets the objective of both parties. I recommend using an advisor to help you think through the balance sheet and associated working capital peg.



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