Mastering NWC Mechanisms
Equip yourself with the knowledge to effectively analyze, negotiate, and document net working capital (NWC) mechanisms to gain or preserve incremental deal economics. Participants learn how the accounting, financial, and legal considerations relate to effectuate a beneficial outcome.
This course is available as a half-day or full-day course depending on experience level of participants and detail sought. Course content will vary based on what modules are included.
Mastering NWC Mechanisms Course Overview
Introduction to Net Working Capital (“NWC”)
- Net Working Capital Defined
- NWC and the Cash Conversion Cycle
- Ways Businesses Finance NWC Needs
- How NWC Needs Vary Across Industries & Businesses
- NWC Optimization
- Fluctuations in NWC as Sources & Uses of Cash
Net Working Capital (“NWC”) Mechanism in M&A Transactions
- The Multiple Ways NWC Can Impact Purchase Price
- NWC’s Impact on Free Cash Flow (“FCF”)
- NWC as a Purchase Price Adjustment Mechanism
- How to Think About “Normal” Levels of NWC in a Business
- NWC and NWC Targets in Seasonal Businesses
- Analogy: How to Think About NWC as Gas in the Car
- How NWC Targets Get Negotiated in M&A Transactions
- Buyer vs. Seller Perspectives and Motivations
- Three Junctures When NWC Typically Gets Calculated During a Sale Process
- Impact of NWC Target on “Same Price” Offers
- How NWC Targets Are Usually Calculated
- Considerations for NWC Targets Expressed as a Discrete Value vs. as a Formula
- Select Best Practice Tips for Buyers and Sellers
- Managing NWC Tighter Post Close as a Valuation Creation Strategy
Determining Adjustments to the Net Working Capital (“NWC”) Target
- Exercise: Adjustments to NWC
- Determining Adjustments to NWC: Review Common Categories Checklist
- Cash-free, Debt-Free Considerations
- Income Tax Asset & Liability Adjustments
- Sub-Account Detail & Trial Balance Level Analysis
- Management Fee Adjustments
- One-Time, Non-Recurring Items Adjustments
- Accounting Considerations as Possible NWC Adjustments
- Special Considerations: Seasonality
- Special Considerations: Negative NWC Businesses
- Special Considerations: Impact of Significant Revenue Growth or Decline on NWC
- Special Considerations: Project Based Businesses and NWC
- Comparing Adjusted vs. Unadjusted NWC—Building Intuition
- Guiding Question to Determine Inclusion or Exclusion of an Account from NWC Analysis
- NWC Negotiating Tricks & Other Practical Considerations
- One-Way vs. Two-Way Tests
- Collars and Caps
- Locked Box Mechanisms as an Alternative to NWC Mechanisms
Documenting NWC Mechanisms in Purchase Agreements
- Where NWC is Commonly Addressed in a Purchase Agreement
- Purchase & Sale Consideration / Purchase Price Section
- Definitions of NWC and Current Assets and Current Liabilities
- Examples of Common Language Found in Purchase Agreements
- Reps & Warranties of the Seller
- Indemnification / Remedies
- Potential Breaches of Reps That Also Impact the NWC Mechanism
- Best Practices to Address—Buyer & Seller Perspectives
- Use of Separate Specific NWC Escrow
- Disclosure Schedules & Exhibits
- Three Junctures During the Process Where NWC Is Commonly Calculated
- Information Asymmetries (Seller Pre-close, Buyer Post-close)
- Notice Periods, Disputes, & Dispute Resolutions Procedures
- Best Practices Using Sample Purchase Agreement
- Decision Framework for Deciding to Include or Exclude an Item in the Final Definition of NWC
- Common Dispute Resolution Procedures
- Common Time Frames
- Use of Independent Accounting Firm(s)
- Who Commonly Bears the Expense of Mediating NWC Disputes
- Payment Considerations
- Best Practices
