“As an M&A analyst, you are tasked with explaining why buyers and sellers negotiate a working capital peg into a purchase agreement, and then calculating the purchase price true-up when a target's actual closing working capital differs from that peg.”
As an M&A analyst, you are tasked with explaining why buyers and sellers negotiate a working capital peg into a purchase agreement, and then calculating the purchase price true-up when a target's actual closing working capital differs from that peg.
Task: explain how a working capital peg protects both sides of a deal from balance-sheet manipulation before closing, then walk through how the true-up mechanism adjusts the final purchase price.
The following terms were agreed in the purchase agreement, alongside the target's actual position at closing.
| Line Item | Value |
|---|---|
| Enterprise Value (Agreed) | $500.0m |
| Working Capital Peg (Target / Normal NWC) | $40.0m |
| Actual Closing Net Working Capital | $32.0m |
| Cash at Closing | $15.0m |
| Debt at Closing | $60.0m |
Equity Purchase Price = Enterprise Value - Debt + Cash
Using this formula, compute the equity purchase price before any working capital adjustment.
True-Up Adjustment = Actual Closing Working Capital - Working Capital Peg
Using this formula, compute the true-up adjustment and determine whether it increases or decreases the price paid to the seller.
Final Purchase Price = Equity Purchase Price Before True-Up + True-Up Adjustment
Assume:
Using these inputs, compute the final purchase price actually paid to the seller.
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