Negotiating Working Capital Targets
A White Paper from Wharton PE/VC Partner, McGladrey
Working capital has a broad definition, but traditionally represents the difference between current assets and current liabilities, with requirements varying between companies, even within the same industry. These differences can result in difficulties between two parties when agreeing upon an amount in conjunction with the sale or purchase of a company. Several common issues often arise between the letter of intent and the final purchase agreement that could place a potential deal in jeopardy. This is why it's crucial to have a keen understanding of working capital management.
A company that is considering entering into a deal must consider several factors involving working captial management, and establish precise targets and definitions to protect themselves against miscalculations during negotiations. This white paper helps to illustrate the importance of working capital from company to company and outlines successful strategies for reaching an agreement and reducing the likelihood of future disputes.
In a video interview with Mergers & Acquisitions editor in chief Mary Kathleen Flynn, McGladrey's Stan Macora says detailed analysis of working capital over time will allow a buyer to understand the target’s trends in working capital and also the seasonality.