Working Capital Adjustments: A Post-Game Challenge

Working Capital Adjustments: A Post-Game Challenge


Businesses face many challenges in successfully closing a transaction. Due diligence can be exhaustive, negotiations can be fraught with unexpected developments and delays, and the time needed to close can be limited. And once a purchase price is agreed upon, parties are not in the clear – for example, one seemingly innocuous provision of a purchase agreement can cause major headaches and worse, litigation.

Challenges and Opportunities

During the sales process, adjustments to the purchase price for changes in working capital arise as a result of the timing differences from when the purchase price is negotiated to when the deal closes. During that time period, a target’s working capital (current assets less current liabilities) fluctuates with operations. Receivables are collected or written off, and payables are satisfied or newly accrued – all of which results in a balance of working capital different from when the purchase price was determined. The adjustment’s importance cannot be overlooked, as sizable swings can add or subtract millions from the valuation.

Our Point of View

Before navigating these waters, businesses in the process of closing a transaction must consider a number of critical areas. These include:

  • Define working capital – Most accountants would not argue about the broad definition of working capital – it is simply current assets less current liabilities. In reality, however, working capital is more complex and ambiguous. Disagreements can arise regarding what should or should not be included in the calculation and items can be easily reclassified among balance sheet categories. Buyers should also be acutely aware of changes in accounting treatments and estimates occurring during the closing period, as these can affect the value of working capital items. It is also important to be mindful of how the working capital adjustment fits within the broader context of the purchase agreement and its other provisions. Common provisions such as those for the allocation of taxes or establishment of litigation reserves, if not fully accounted for, could result in either party being unjustly penalized twice.
  • Establish a benchmark – Because the adjustment for working capital is based on the change from one level to another, it is important to ensure that the former is the appropriate starting point. A baseline level of working capital can be determined through various methods, such as analyzing historical averages, benchmarking against comparable companies within the industry relative to size, or utilizing industry rules of thumb.
  • Ensure quality – The quality of the components of working capital is just as important as the level established. During the due diligence process, the aging of accounts receivable and other assets are analyzed and scrutinized for their quality and the likelihood of future cash flow generation. Likewise, at closing, it is important to re-analyze the quality of the target’s accounts, as items could have materially deteriorated – especially if items identified during due diligence were borderline delinquent.

How We Help Companies Succeed

Protiviti’s Transaction Services team provides strategic advice to financial sponsors and strategic buyers during acquisitions and divestitures. As part of this work, we frequently advise our clients on the implications of working capital and purchase price adjustments. We assist our clients in structuring working capital provisions, calculating and benchmarking normalized working capital levels and assisting in the negotiation of post-closing purchase price adjustments.

Merging two or more organizations is a complex transaction filled with risk. The best deals follow a structured and disciplined approach with clear strategic objectives, comprehensive due diligence, detailed integration plans, and a focus on creating and capturing value. Although such planned approaches may sound simple, history shows many failed M&A attempts that have resulted in significant impacts to shareholder value.

Our structure allows us to respond quickly to your needs on a global basis with cross-disciplined teams that bring broad perspectives and deep expertise capable of leading the transaction PMO and diving deep into a variety of business and regulatory issues. With our structure, we are uniquely able to deploy a flexible delivery model that adapts to the constantly changing fixed and variable resourcing needs of each transaction.

We have assisted some of the world’s largest organizations with some of the biggest transactions in history, providing services across a range of operations and assets. We focus on key risk areas like no other partner you will work with, with proven project management tools and techniques that help fully capture the targeted results of your deal.




Jason Crockett
Barry Rieger


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