Importance of Net Working Capital ("NWC") in M&A

February 2019

By Gen Oraa, Managing Director – Transaction Advisory Services, BDO USA, LLP

Is additional spending for legal and accounting fees post transaction worth resolving a working capital disagreement? How about the disruptive impact of management distractions and the related cost of a working capital dispute on operations? Buyers and sellers can avoid these potential challenges by performing a comprehensive net working capital analysis prior to closing a transaction.

A net working capital analysis is one of the key areas in financial due diligence, in addition to a quality of earnings analysis—i.e., adjusted EBITDA (earnings before interest, taxes, depreciation and amortization)—and a debt and debt-like items analysis. Each of these analyses may have a potential positive or negative dollar impact to the buyer or the seller as part of a transaction. Working capital is generally defined as current assets minus current liabilities, although it is a bit more complicated when you drill down on the specifics...