Financial Due Diligence for true working capital

This topic contains 1 reply, has 2 voices, and was last updated by  Markus Gustafsson 5 days, 6 hours ago.

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  • #119964

    Pawankumar Sharda
    Participant

    How detailed should one go into Financial Due Diligence to determine the Working Capital target? Due to complex accrual processes or many unknowns, there may be situations where some expenses may be overstated or underspent that may affect the working capital need. This is normally true in the case of project-based companies where project operating expenses are based on assumptions and budgets. They are not consistent period over period due to projects. Actuals may vary from the budget and go either direction. Is there any Financial DD process post cutoff date for any working capital true-ups?
    p.s – For large size companies, it may be immaterial. However, M&A deals in mid-size & small-size companies, working capital variation by a few million dollars may be material.

    #120604

    Markus Gustafsson
    Participant

    I think that if there is uncertainties of what is normalized working capital and if it is of material size, it is for the best to sign an agreement of how to handle working capital deviations from the normalized working capital in the SPA. If it is a carve-out one could handle it by keeping receivables and payables at the selling company and adjusting the price accordingly.

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