The agreement sets a target and adjusts the price for the actual closing balance. Disputes concern the accounting principles applied, whether items were consistently treated, and the calculation of specific reserves and accruals.
Resolution typically proceeds to an accounting expert.
Alternative Names:
Working Capital Dispute|Net Working Capital Adjustment
Why it Matters?
Consistency with historical practice is the standard most agreements adopt, which means a buyer applying different reserve assumptions than the seller historically used will lose even if its methodology is more conservative. Specifying an illustrative calculation with the agreement is what prevents these disputes, since it fixes the methodology by example rather than by principle. The expert determination is typically binding and limited to the disputed line items.
Frequently Confused with
Related terms
Frequently asked questions
What standard governs the calculation?
What prevents these disputes?
