What is working capital and why is it important for M&A transactions?

Working capital considerations in merger and acquisition (“M&A”) transactions – the bane of many a solicitor’s life when drafting agreements in this space. A lot of solicitors choose to avoid accounting principles for a reason: for fear of liability issues and the overwhelming realisation that by even venturing into this space, a solicitor may be out of his/her depth. Solicitors often seem to turn a blind eye to what is included in agreements in this respect. However, a good commercial solicitor can’t avoid the inevitability of having to, at least at a very high level, understand the mechanics of working capital considerations for the purposes of M&A transactions.

So, what is working capital?

Taken from Investopedia.com (an excellent website that every commercial solicitor should have at their fingertips) – working capital is the “measure of a company’s liquidity, operational efficiency and short-term financial health”. It’s the difference between a company’s current assets and current liabilities.

Why is working capital important for M&A transactions?

This calculation is important because a buyer of a business needs to know how much working capital (the money that a business has to meet its short-term obligations) will be left in the business after the sale transaction has become effective. The extent of working capital left in a business after a sale is also often the subject of purchase price adjustments and needs to be carefully looked at to ensure that the specifics of the business in question are adequately considered and catered for in the agreement when dealing with any proposed adjustments.
Failing to look at this properly, before the deal is done, can lead to unnecessary time wasted and legal (and other) expenses.

At Tiger Law we specialise in M&A transactions and can help clients successfully navigate these tricky waters. Don’t hesitate to give us a shout should you need help in this respect.

Contact Jonathan by emailing admin@tiger-law.com or calling 01233 227 355.

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