Needless to say, COVID-19 has impacted the economic landscape of many businesses, across a wide array of industries, around the globe. As a result, many businesses have experienced increased risk and uncertainty about the future. This risk and uncertainty have caused many proposed and pending M&A transactions to be renegotiated, put on hold or terminated altogether. Even the deals that made it to the closing table over the last year were impacted, and in many instances, continue to be impacted, in some form. For the deals that have closed, there are two primary areas that have given rise to post-closing disputes: working capital true-ups and earnout measurement periods.
Working Capital True-Up
Working capital is customarily defined as current assets of a company less its current liabilities. In the context of a transaction, working capital typically adjusts for the removal of cash, short-term debt and income taxes payable. Regardless, the purchase agreement commonly defines how working capital is to be calculated in a specific transaction. The purchase agreement will also include the working capital target that is to be delivered by the seller at closing. If closing working capital is greater than the target, the buyer owes cash to the seller and vice versa. For obvious reasons, this post-closing adjustment is often a point of contention between buyers and sellers.
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