We are concerned about the ninety-day post-close working capital true-up, as we have heard horror stories of buyers clawing back cash from the purchase price. How do we establish a clear and defensible net working capital target in the purchase agreement to prevent post-close disputes?

Question

Tyler Smith · Accepted Answer

The net working capital true-up is a frequent battleground in M&A transactions. Buyers often use this post-close adjustment to claw back cash by arguing that the working capital delivered at close was insufficient to run the business. To prevent this, you must establish a clear and defensible net working capital target, or peg, in the purchase agreement.

Start by calculating your historical net working capital over a twelve-month period to account for any seasonality. Do not let the buyer use a cherry-picked timeframe that inflates the target. Your goal is to establish a representative baseline of what the business actually needs to operate on a daily basis.

Define exactly what is included in the working capital calculation. Ensure that cash, debt-like items, and non-operating assets are excluded. Be specific about how inventory, accounts receivable, and accounts payable are valued, using consistent GAAP accounting principles.

Use your internal team to run monthly working capital simulations leading up to the transaction. This ensures that you have a precise understanding of your balance sheet position and can avoid any unexpected swings at the closing table. A well-defined peg protects your cash and ensures a clean, dispute-free transition.