You are selling your business, and all of your ducks are in a row. You hired an investment bank, they wrote an investment memorandum, solicited bids, and found a buyer willing to pay you a hefty sum for all of the blood, sweat and teas you invested in the business over the last umpteen years. You passed all of the tests during due diligence, and are negotiating the finer points of the purchase agreement. The finish line is in sight. And now you learn about the working capital peg.
The working capital target (also known as a “peg” or “true-up”) is an important part of an acquisition where millions of dollars are at stake, is poorly understand by many, and is typically left until later stages of the deal. Very often, sellers leave significant amounts of money on the table ( to the benefit of the buyer) as a result of not understanding and addressing the working capital issue earlier in the acquisition process. In fact, sellers would be best suited to understand the impact of working capital well before they begin the process of selling their company. Below I explain the ins and outs of how working capital can have a big impact on how much cash you take home after you sell your business.
By: Adam Friend, BCMS Corporate, LLC
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