What are the five reasons for disputes in working capital and how to avoid them
Merger agreement net working capital or “NWC” provisions are commonplace, required because the target company’s actual closing date working capital can only be estimated by the seller when the deal closes, and must be finalized by the buyer after closing. The general concept is simple – the buy- and sell-side parties to a merger agreement agree to a specific value for the NWC target during the deal negotiations, frequently referred to as the “peg”, and any surplus or deficit between actual closing NWC and the peg is transferred to the seller or buyer respectively post-closing. Although this is a well-understood concept, NWC disputes arise on a significant number of transactions. The Professional Services Group at SRS Acquiom has resolved numerous post-closing working capital matters and disputes. In this article, we discuss a few of the more common types of issues that regularly cause NWC disputes, and some practices that can potentially mitigate these issues.
#1: NWC Mechanism Theory
#2: NWC Accounting Measures – GAAP vs the Company’s Historical Accounting Practices
#3: Subsequent Information in the Post-Closing Period
#4: Certain Balance Sheet Accounts
#5: Overlaps Between Indemnification and NWC