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Key Takeaways Working capital disputes are common and costly. Post-closing disagreements over working capital definitions, accounting decisions and timing can lead to legal battles, frustration and damaged relationships.
Most disputes can be avoided by clearly defining working capital terms upfront, aligning with respective incentives and establishing a neutral third-party arbitration mechanism.
The deals that flow smoothly are the ones in which both parties actually agree on what they are buying and selling.
It took three months to close on a $140 million acquisition when the CFO of the company I acquired called me. We were doing a post-close working capital reconciliation, and the seller and I were at odds by $3.2 million. That was not the call you want to receive late on a Friday.
The root cause? How we defined and calculated net working capital. A simple reconciliation process turned into a six-month argument that burned through legal fees, strained relationships, and converted what felt like a smooth deal into something that created frustration for all parties involved.
During the next 18 months, I witnessed this same exact scenario occur in four more M&A transactions within our portfolio. Teams spent months discussing the purchase price, earnouts and reps & warranties. Then they tacked on a working capital clause (typically copied and pasted from prior agreements) in the final couple of weeks leading up to closing without considering the details.
Why working capital is ignored
Most people view acquisitions as a valuation exercise: What is the value of the business, and what am I willing to pay for it? All the stakeholders focus on the valuation questions. Working capital is viewed as “plumbing.” It is necessary but boring.
Working capital mechanisms are used to adjust the purchase price of the business based on the amount of working capital at closing versus the expected working capital at closing. This mechanism exists because a business’s cash position changes throughout the year. Therefore, the acquirer is purchasing the enterprise and not the business at a specific point in time.
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