Working capital/net asset adjustments
This is often one of the most frequently misunderstood areas of corporate transactions.
This may be because the accountants or lawyers that draft these clauses often use different terminology’s and methods of calculation.
The adjustments have a direct impact on the price being paid for a business and it is therefore crucial to take this very seriously when negotiating the price.
We can add considerable value to a deal by assessing normal levels of working capital. We are experienced with the negotiations involved in the agreement of such clauses.
The 'Locked Box' approach is becoming more popular. In such deals, the price paid is based on historical balance sheets, foregoing the need for potentially lengthy post-completion purchase price adjustments. Under a Locked Box, the buyer and seller agree on pre-completion balances that do not change regardless of the position on completion. The buyer must obtain legal protection to ensure that the sellers do not take dividends or otherwise adversely effect net assets. One big advantage is that it removes the requirement to prepare completion accounts, but this approach is not suitable in all circumstances.