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Definition of Net Working Capital Target

The net working capital (NWC) target is a predetermined level of net working capital that is agreed upon by the buyer and seller in an acquisition or merger. It serves as a reference point against which the actual NWC at the time of closing is compared to determine any purchase price adjustments.

Here's a short example of how the NWC target works in an acquisition:

  1. Company A is acquiring Startup B, and they agree on a purchase price of $10 million.
  2. As part of the acquisition agreement, they set an NWC target at $2 million. This means that Startup B should have $2 million of net working capital at the time of closing for the deal to proceed as planned.
  3. Prior to the closing date, Startup B's financial statements are prepared, and the actual NWC is calculated to be $2.5 million.
  4. Since the actual NWC of $2.5 million is higher than the agreed-upon target of $2 million, the purchase price is adjusted. Company A will now pay $10 million + ($2.5 million - $2 million) = $10.5 million to acquire Startup B.

In this example, the higher NWC for Startup B led to an upward adjustment to the purchase price since it exceeded the NWC target.