In the purchase agreement for the sale of a business the term “net working capital” typically refers to the minimum capital required to maintain current operations of the business enterprise. Calculating the amount of net working capital is more than just current assets minus current liabilities. It involves complex negotiations between both the buyer and you (the seller), and each of your financial advisers, lawyers, and accountants. In these negotiations, you determine which assets and liabilities should be included in net working capital.
The buyer wants to make sure he or she is getting what she pays for, and as the seller, you want to make sure you are not leaving any money on the table. The buyer will often request a purchase price adjustment to be included in the purchase agreement. This clause will lower the purchase price if the net working capital falls below a certain, agreed upon level on the closing date. However, if you keep the net working capital above that specified level, you receive a higher purchase price.
Be wary: purchase price adjustments with large variance often give rise to intense disputes between buyers and sellers.
For almost 20 years Kim Lowe has lawyered from the trenches. Kim lawyers from experience, using her knowledge of the law and understanding of how both for-profit and nonprofit business enterprises operate.
Emilee Walters is a second year law student at the St. Thomas School of Law. Emilee is an Avisen Fellow alum exploring a legal career in business law.
Todd helps business owners and their companies solve legal and business problems related to financing, startup, formation, shareholder disputes, contract drafting, negotiations, SEC compliance, company sales and purchases.