Don’t be surprised by this adjustment when selling your business
In a recent blog, we covered some typical adjustments you can expect that will impact the gross payout you receive from an acquirer versus the net amount of dollars you actually receive. Another important and typical adjustment you should be aware of, well in advance of exiting, occurs with the purchase price the acquirer pays you and it’s called the Net Working Capital (NWC) adjustment. This NWC adjustment can impact the actual purchase price you receive the day your transaction successfully closes with the acquirer.
Due diligence is the opportunity for an acquirer to conduct a deep dive into your company so they can fully understand everything they need and want to know about owning your business. One area they will probe will be to understand how much working capital your business needs on an average basis to successfully operate it. They will take your historical financials (generally at least 3 years) and look to see what this amount is and they will then negotiate with you as to what the amount of NWC the business needs to have on hand the day they complete the acquisition. The outcome of this negotiation will be to set the target, or what is referred to as the “peg” rate for what the NWC should be on day of transaction successfully being completed. You therefore also want to conduct such an analysis to be clear on what the NWC needs are of the business because both parties will negotiate this peg amount and it can impact the final purchase price. If on the day of completing the transaction the actual NWC amount on hand is below the negotiated peg rate, then the seller will have to accept a lower purchase price to make up for the gap. If, on the other hand, the NWC on hand is above the negotiated peg rate, then the seller will receive a greater gross payout.
This NWC adjustment for some sellers can be a large number and can have a meaningful impact on the proceeds received for the sale of their company. It’s for this reason that you will want to be on top of this analysis and well prepared to negotiate the peg amount with the acquirer. Managing this important adjustment can be the difference between being unhappy or euphoric with the amount you are paid for your company.
