How do you handle working capital at an M&A closing — the NWC adjustment mechanism?
the SPA contains a 'locked-box' or 'closing accounts' mechanism. Locked-box: the working-capital position at the reference date (e.g. December 31 before closing) is 'locked' — the buyer bears the risk / upside between the reference date and closing. Closing accounts: NWC at closing is actually calculated, compared with the reference NWC, and the difference becomes a purchase-price adjustment. Reference NWC = a 12-month average ('normalized NWC') — typically the negotiation hot spot.
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TechCo Inc is being sold, reference NWC = $25m (LTM average). Closing NWC on June 30 = $30m. The buyer received $5m more operating capital → the seller gets a +$5m purchase-price adjustment. Key negotiation points: (a) which items are in the NWC definition? (b) the seasonality mechanism? (c) the disputed-item resolution mechanism (typically Big Four arbitration).
the NWC adjustment is sell-side standard in middle-market deals — 90% of middle-market M&A SPAs have it.