Working Capital Adjustments: At the Crossroads of Law and Accounting
Working capital adjustments are often some of the most highly negotiated provisions in a private company M&A transaction agreement. The provisions are complex and involve a blend of legal and accounting concepts and standards and can have an immediate impact. It is essential that deal team members understand not only the nuts and bolts of working capital adjustments but also the nuances thereof to avoid traps for the unwary. M&A lawyers must be fluent with the constituent elements of working capital in a particular business in order to properly understand their client's business objectives and to properly document the business agreement. Working capital is often crucial to the operation of a business and can significantly affect valuation. Buyers often bid on an acquisition on a cash free, debt free basis, assuming an amount of working capital sufficient to operate the business at closing. The devil, however, is very much in the details.
In this article, which was originally published in the New York Law Journal, Dechert and Alvarez & Marsal together explore the various issues M&A counsel will face when drafting and negotiating working capital adjustments and highlight several potential "problem areas."