A company needs a certain level of inventory and receivables to operate, financed partly by supplier credit. This capital is already included in the enterprise value. Buyer and seller therefore agree a target value, often the average of the last 12 months. If actual NWC at the reference date is higher, the purchase price increases; if it is lower, the price decreases.
For sellers, the target value is one of the most important negotiating parameters after the multiple. A target set too high reduces the purchase price without this being obvious at first glance. Seasonal fluctuations, growth or one-off large orders can distort the average and must be explained.
The purchase agreement defines which balance sheet items count towards NWC. Customer prepayments, provisions or other assets are often disputed. The items should be consistent with the definition of financial debt so that nothing is counted twice.
Example
Hypothetical example: At closing, a wholesaler has €2.4 million of inventory and €1.8 million of receivables, against €1.1 million of trade payables. NWC is €3.1 million. With a target value of €2.8 million, the purchase price increases by €0.3 million.
Sources
- M&A Vocabulary: Experten verstehen „Working Capital Adjustment“, Rödl & Partner
- Net Working Capital Adjustments: Wie Kaufverträge versteckte Risiken bergen, IWW Institut, Praxis Unternehmensnachfolge