Net Working Capital (NWC): Why It Matters in M&A Transactions

When business owners think about value, they often focus on revenue and EBITDA. But in mergers and acquisitions, net working capital (NWC) can have just as much impact on deal economics, especially at closing.

Net working capital represents the capital required to operate the business on a day-to-day basis. In most transactions, buyers expect the business to be delivered with a normalized level of working capital, ensuring operations can continue smoothly post-close.

What Is Net Working Capital (NWC)?

Net working capital is generally calculated as: Current Assets – Current Liabilities

Typical components include:

Current Assets

• Cash (sometimes excluded, depending on deal structure)

• Accounts receivable

• Inventory

• Prepaid expenses

Current Liabilities

• Accounts payable

• Accrued expenses

• Short-term liabilities

While the formula is straightforward, the interpretation and treatment in a transaction often is not.

Why Buyers Care About NWC

From a buyer’s perspective, net working capital ensures the business has enough liquidity to operate immediately after closing. If NWC is too low, the buyer may need to inject additional capital to fund payroll, inventory, or vendor payments.

To avoid this risk, buyers typically require a target or normalized level of NWC to be delivered at closing.

How NWC Affects Purchase Price and Closing

Net working capital is commonly addressed through a working capital adjustment:

• If actual NWC at closing is above the target, the seller may receive a positive adjustment

• If actual NWC is below the target, the purchase price may be reduced

This means two deals with the same headline purchase price can produce very different proceeds depending on working capital outcomes.

Common NWC Pitfalls for Sellers

Many sellers are surprised by NWC discussions late in the process. Common issues include:

• Seasonal fluctuations not accounted for in the target

• One-time expenses or temporary payables

• Aggressive collection or delayed payments before closing

• Misunderstanding which accounts are included or excluded

Without preparation, NWC can become a point of friction, or an unexpected value leak.

How Preparation Protects Value

Experienced advisors help sellers prepare for NWC early by:

• Analyzing historical working capital trends

• Establishing a defensible normalized target

• Anticipating buyer assumptions

• Coordinating with accounting teams before diligence begins

  
  

Early planning reduces surprises, preserves value, and supports smoother negotiations.

Net working capital isn’t just an accounting concept, it’s a key driver of deal economics.

Understanding how NWC is calculated, negotiated, and adjusted helps sellers protect their proceeds and helps buyers ensure operational continuity post-close.

In M&A, it’s not just what you sell the business for, it’s what you deliver at closing that truly matters.