What is net working capital?
Net working capital — NWC — is the difference between a business's current operating assets and its current operating liabilities. In broad terms it is receivables plus inventory minus payables and other short-term operating obligations: the cash a company has tied up in the day-to-day operation of the business at any moment.
In a deal context, the precise definition matters more than the textbook one. The parties agree which accounts are in and which are out — cash and debt are usually excluded because they are handled separately on a cash-free, debt-free basis. The negotiated definition determines what gets measured, so it is set out carefully in the purchase agreement.
Net working capital is the figure the working capital peg targets and the closing balance sheet measures. The gap between the agreed normal level and the actual level at close drives a dollar-for-dollar adjustment to the price.
Why net working capital matters in a deal
NWC is where the timing of a transaction meets the operating reality of the business.
- It is the cash the business needs to run. Too little working capital at close, and the buyer must inject cash on day one to keep operations going.
- It can be managed in the seller's favor. A seller can temporarily flatter cash by delaying payments or accelerating collections just before close — which the peg and the trailing-average normal are designed to neutralize.
- It drives the closing adjustment. Actual NWC at close is compared to the peg, and the price moves dollar for dollar with the difference.
- Its definition is negotiated. Which accounts count as operating working capital is itself a point of leverage, because moving an item in or out shifts both the peg and the adjustment.