Working Capital Targets in Inflationary Environment

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December 03, 2021

by a searcher from Indiana University South Bend - Judd Leighton School of Business and Economics in Granger, IN, USA

Typically a WC target can be up to a year. However, in today's environment (especially looking at a steel fabricator), what are people seeing? Price increases to offset cost increases, inventory bloat, are materially increasing the working capital needs of a business.

So thinking about 90 days post close, why would I agree to a target that's already significantly below the last month or two's net working capital? Is that fair that seller gets that additional cash?

Or are people looking at a 2-3 month average? In my mind, they aren't delivering 'more' of anything just more expensive of the same quantities and I shouldn't have to relieve them of the bloat that happened on their watch?

I would love to hear how people are approaching this negotiation.

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Reply by a searcher
from Harvard University in New York, NY, USA
It’s a great question Conrad. In inflationary environments, I have seen middle market businesses agree to a 3 month trailing average. Thinking outside the box, perhaps you could consider asking for certain inventory items to have a volume target (e.g. tons) as well.
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Reply by a searcher
in Tyler, TX, USA
I agree the 3-month target would be a strong way to play this. You should also think about setting a collar around that peg (in which there will be "no blood") to reflect any expected continued increase in NWC.
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