Meaning
Corporate acquisition agreements establish a baseline level of operational liquidity that must be held at the closing date of the transaction. Setting a net working capital peg prevents the seller from depleting inventories or accelerating collections before ownership transfers.
Target Baseline
Operational metrics over the preceding twelve months are analyzed to calculate a representative average of inventories, accounts receivable, and payables. This average becomes the net working capital peg used in the purchase agreement. Setting the target appropriately ensures that the business can continue to run normally without requiring immediate cash injections from the buyer.
Purchase Adjustment
Settlement processes compare the actual working capital on the closing day against the agreed baseline. If the closing working capital is lower than the net working capital peg, the final purchase price paid to the seller is reduced by the difference. Conversely, any surplus above the baseline results in an upward adjustment to the transaction value, which requires the buyer to pay additional cash to the seller at settlement.
Liquidity Management
Managing ongoing cash flows is necessary when sellers try to manipulate asset levels. When a transaction uses a net working capital peg, such moves are neutralized because the abnormal fluctuations are captured during the closing audit. Buyers use these mechanisms to protect the business’s operational continuity and cash reserves.
