Picture this: you bought a house and then realised you didn’t budget for the movers, the new locks, the lawyer fee, the renovation, the furniture? That’s what happens in M&A when companies overlook net working capital (NWC). It’s like buying the house and forgetting that you actually need cash flow to keep the lights on.
Now, if you’ve ever been involved in a deal—whether as a CFO, a founder, or just the poor soul stuck in due diligence—you know how much effort goes into closing.
Valuations, synergies, legal battles… it’s a ring of tactical warfare and once the confetti settles, the real game begins: keeping the business running smoothly. And that’s where NWC can sneak up and kick you in the balls (from my pov, cos uncle is a male).
What’s the Big Deal with Net Working Capital (“NWC”)?
NWC is essentially the cash cushion that keeps the business afloat day-to-day. It’s the difference between current assets (stuff like accounts receivable and inventory) and current liabilities (bills, salaries, supplier payments—aka the stuff you owe). Get this wrong post-acquisition, and you’ll quickly find yourself in a cash crunch.
Here’s a classic scenario: A buyer acquires a company based on historical NWC, but right after the deal closes, they realize that the seller has aggressively collected receivables and slowed down payables to make the balance sheet look good.
What does that mean? The buyer now has to pump in extra cash just to keep the business running. Fun times.
The Great Negotiation Dance
In most deals, buyers and sellers negotiate a target NWC. This target is typically an average of the company’s working capital over the past 12 months. But here’s the kicker—seasonality, business cycles, and one-off events can mess with these numbers. If you’re not careful, you might inherit a business that looked healthy on paper but is actually gasping for air.
Take retail, for example. If you buy a company right after the holiday season, the working capital might be artificially high because of all the cash from Christmas sales. But come March, when sales dip and inventory is bloated, you’re in for a surprise. That’s why timing and deep diligence matter.
Imagine buying Manchester United Football Club (one of the most valuable club in the world) but now you have to spend 10% of your purchase value to fix the old stadium – one of your main revenue generator (yeah.. I’m not a fan).
Recent Trends: Why NWC is Even Trickier in 2025
With supply chain disruptions still lingering and inflation throwing cost structures out of whack, NWC has become a minefield. Companies are holding more inventory to hedge against delays, and payment terms are getting stretched on both sides. Just last quarter, a buddy of mine was advising on a mid-market deal where the buyer underestimated post-close cash needs by 40%—all because supplier lead times had doubled.
Another trend? Private equity (PE) firms are getting savvier. They’re baking in tighter NWC adjustments to avoid surprises. But some strategic buyers? Still getting burned. They focus on EBITDA (earnings before interest, taxes, blah blah blah) and forget that positive EBITDA doesn’t mean cash magically appears in the bank.
So, How Do You Avoid an NWC Disaster?
- Scrub the Numbers Harder Than Ever – Look beyond averages. Analyze trends, seasonality, and outliers. If there was a sudden dip or spike in working capital, ask why.
- Understand the Seller’s Game – Is the seller playing with receivables and payables? Are they delaying payments to suppliers to pump up cash flow? You gotta know.
- Model Post-Close Scenarios – Assume things will go sideways. What happens if collection cycles slow down? If customers take longer to pay? Build these into your forecasts.
- Negotiate a Fair NWC Target – Don’t just accept a rolling average. Push for a structure that reflects business realities post-close.
- Have a Cash Buffer – Always, always assume you’ll need more cash post-close than you think. Because you probably will.
Let’s Talk
Ever seen an NWC nightmare firsthand? Or maybe you’ve got a war story about a deal that almost went sideways? Let uncle know, I’d love to hear how you navigated the chaos. And if you’re in the middle of a deal right now, well… may your cash flows be ever in your favor, “may the cash.. flows be with you”