Liquidating working capital

A working-capital hurdle is a predetermined working-capital amount that is assumed in the purchase price.For example, a deal might include a purchase price of m based on the seller’s delivery of m of working capital at closing.A hurdle increases the likelihood that the buyer will obtain the expected relationships in addition to the expected cash flows.Calculating the working-capital hurdle The most common method for calculating a hurdle is based on the average monthly adjusted working capital over a 12-month period.When the buyer then takes over the company, it will have less inventory to sell and will need to incur higher-than-expected costs to rebuild inventory levels.Instead of paying its vendors in the typical 30 days, the seller might stretch its payments to 60 days.

An agreement might, for example, define working capital as: (i) current assets (excluding cash); (ii) less current liabilities (excluding debt); (iii) less items that are excluded by definition in the purchase agreement; or (iv) plus or minus pro forma or due diligence adjustments determined during the financial due diligence analysis (such as the need for a bad-debt allowance).The working-capital hurdle could also be set as a range (.5m to .5m, for example).The purchase price would be adjusted up or down based on the actual working capital at closing.The adjustment is often made on a dollar-for-dollar basis.In the example above, with a hurdle of m, if the seller delivers only .5m of working capital, the purchase price would be adjusted to .5m.

The need for working-capital hurdles A working-capital hurdle is intended to ensure that the buyer receives the expected mix of assets and liabilities (that is, the company’s normal working capital needed to run the business) in the transaction.

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Liquidating working capital introduction

Liquidating working capital

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