Working capital - simpler alternatives to TTM average NWC

January 12, 2025

by a searcher in Chicago, IL, USA

I am looking for simpler language to use in the LOI to account for working capital without using the more commonly used TTM WC average. The goal is to simplify language to avoid f the hole that working capital negotiation can become.

My initial thought is that asking for ~6-8 weeks of expenses in cash at closing to cover expenses would be simpler to calculate and digest for the seller in the LOI. All I would have to do on my end is to ensure that this amount is enough to cover the cash outflows until cash comes in. Have you seen this before? Any other ideas on ways to simplify the

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Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

1. You have no legs to stand on when you say x weeks for expenses. This approach is outside the norms. Seller's advisors will have difficulty accepting. And, where is the seller going to cash from?
2. No seller leaves cash in the company. They cannot. It is not practical even if party agrees.
3. You DO NOT want seller to keep calling YOUR customers for A/R collection. And YOU DO NOT want seller to pay the A/P. If he does not, suppliers have legal recourse to you.
4. NWC us the safest route for you and the one easy to convince seller and advisors. The biggest hurdle you have is what ^redacted‌ mentioned and that is whether price includes WC or not. The second hurdle is what is NWC. And, 3rd hurdle is getting monthly data and understanding accounting policies.
5. There are simpler ways to document the English for NWC. The one I have used for 35 years, is to quantify it in LOI. Btw, TTM may, or may not be the best for buyer.
I have taught this subject for years and have helped many broken deals recover.
Happy to help, I am also in Chicago.

Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA

My opinion is that the challenges on NWC negotiations are due to the dollars involved, not the language. If I was a seller, I wouldn't want to give you 8 weeks of expenses either for a company that you own. Where does 8 weeks come from vs some other number? How do you explain to a seller why they should cover your first two months of expenses?

You can move it to the purchase price like Shaun suggested but that then leaves you open to the potential manipulations that the TTM is trying to address (seller collects AR more aggressively than historical for example).

I think there is a lot to be said for keeping an offer as vanilla as possible so you can at least point to market norms. TTM is the most common NWC term. My most difficult conversations on NWC/Inventory are when sellers don't think any should be included in the price and is in addition to the offer. No smoothing of the language can bridge that divide.

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