In today’s competitive market, deal-makers want to complete transactions quickly at the right valuation. To ensure this outcome, starting the working capital mechanism discussion at the onset of a transaction is more important than ever.
However, working capital negotiations can become very complicated when a company is being bought or sold because it’s not always so simple to agree on the right amount of working capital and the working capital definitions.
Typically, at the beginning of a deal, the letter of intent has some general language about the working capital so the buyer can feel comfortable going into the deal. It’s at the end of the deal that very precise working capital language comes into play. However, waiting until the end of the deal often creates undue issues that can impact the closing of a transaction.
A competitive market, like the one we’re experiencing, tends to make it easier for sellers to walk away if a deal isn’t finalized quickly. Buyers and sellers often have very different viewpoints on what is the right amount of working capital, which could result in a killed deal. Unfortunately, it’s all too common for both parties to leave discussions about working capital levels until the deal gets close to a close. If a working capital agreement can’t be reached and the deal falls apart, it is a huge waste of time and money for all involved parties.
Having a deal die because of disagreement over working capital levels may be extreme, but not talking about the working capital mechanism early on can create other problems as well.