Net Working Capital *could* be simple, but rarely is.

AR minus AP is expected when transactions get over ~$5M in Enterprise Value, but some buyers ask for minimum operating cash along with normal net working capital.

We’re not fundamentally opposed to it, and the amount is simply netted out from the seller’s proceeds when comparing offers.

But we need to know the total.

We can leave it open ended in an Indication of Interest, but we want to nail down 1) the $ amount, 2) the mechanism to calculate it, or 3) ideally, both before signing a Letter of Intent.

The problem

This can mean vastly different things to different buyers, and we need to compare apples to apples offers, so we have to get specific.

An inexperienced buyer might expect the entire average checking account balance from the trailing 12 months. This happened recently. Good thing we clarified!

That’s an unreasonable amount. More experienced buyers understand that the transition period is hectic and don’t want the company unable to pay its bills on the day of closing. Even if the buyer is injection new cash, delays happen.

The seller wants to be specific enough to know and compare, while the buyer wants to be flexible enough to adjust if the data moves. We can usually accomplish both.

How to Fix

Some ways we’ve this calculated clearly in LOIs:

- “1 week of overhead” (list the P&L section and any excluded accounts)

- “18 days of operating cash” (Cash Conversion Cycle x (Expenses / 365))

- “An amount equal to one payroll period”

- “$10,000” (this one’s easy)

In each case, the line above should be followed up with an expanded definition (does payroll period include benefits and taxes? probably, but let’s define it) and an estimate of the amount based on the information available at LOI signing.

Having both parties independently calculate the amount is a great test of the definition!

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