Working capital adjustments

Question 1

When do WC adjustments happen?

Answer 1

Mostly acquisition of private companies on cash free, debt free basis

Idea: WC adjustment keeps buyers effective price the same but changes proceeds to selling shareholders

Based on how well company manages it WC relative to its target WC

Question 2

Why are WC adjustments important

Answer 2

Incentivize managemetn to run company normally as deal closes

Target wc relative to actual one

Question 3

How does the mechanism work?
Below WC

Answer 3

If WC below target level:
buyer will reduce Purchase price EV and will pay himself for additional funding to bring WC to target

Result: Buyer pays the same price, but seller gets less!

Question 4

Does Investor Equity change due to it?

Answer 4

No it remains the same

Question 5

What really changes?

Answer 5

The purchase equity value is what really changes

WC above increases EQV for seller
WC below reduces EQV for seller

Question 6

Why do buyers do these adjustements?

Answer 6

They dont want to have to fund additional for day 1 operations

• Seller “forgets” to pay bills before the deal
• Seller doesnt order enough inventory

Question 7

Are there any impact in DCF or 3 statement model or LBO?

Answer 7

Change in WC line doesnt really change since adjustment happens before

No change in IRR

Needs to be recorded in Balance sheet but changes remain the same

Question 8

Are provision part of WC

Answer 8

No they are not since non cash liabilities

Found in B/S under Liabilities

Question 9

Is factoring part of WC?

Answer 9

Technically part of current asset but conceputally not operational.

Question 10

Fifo vs Lifo

Answer 10

Question 11

What else is part of CFO?

Answer 11

+ Impairments
- Gains on sale assets
+ SBC
- INcreases in dta
+ Increases in dtl

Question 12

What is the difference between Trade WC vs nwc vs other nwc?

Answer 12

Trade WC: Purely operational
AR+ INV - AP

NWC: Broader accounting concept
Current Assets - Current Liabilities

Other NWC: remaing
NWC - Trade WC

Question 13

Where are accrued expenses, prepaid expenses on the balance sheet?

Answer 13

Accrued expenses: Current liabilities

Prepaid Expenses: Current Assets

Question 14

What are accrued revenue shares?

Answer 14

• unbilled revenue / liabilitz to accrued revenue

earned revenue but has not yet invoiced or received payment

Question 15

What items are part of WC?

Answer 15

Varies from company:
AR -
Inventory -
Prepaid Expenses -
Accrued liabilities +
Deferred Revenues +
AP +
Tax provisions +
Operating Provision +

No Cash or Debt!!!!!

Question 16

How does the mechanism work?
Above WC

Answer 16

If WC above targeted level:
Buyer increases purchase Price EV
and take some of the WC excess for itself after the deal

Result: Buyer get same price, but seller gets more