Understanding Net Working Capital Peg in M&A Transactions

This guide explains the concept of Net Working Capital (NWC) Peg in mergers and acquisitions (M&A) transactions. It outlines how the NWC Peg impacts the purchase price during the sale process of a business. The document details that businesses are typically sold on a cash-free, debt-free basis, focusing on the operations rather than cash and debt. NWC is defined as the difference between current assets, excluding cash, and current liabilities, excluding debt. The NWC Peg represents the target NWC amount that must be delivered at closing to ensure the business operates normally under new ownership. The guide describes the negotiation process for determining the NWC Peg and the implications of miscalculating it, which can affect the purchase price. It also discusses the post-closing true-up process to adjust the purchase price based on actual NWC. A well-defined NWC Peg is crucial for ensuring fairness in the transaction and protecting both parties' interests.