Effective working-capital planning ensures the carved-out entity has enough liquidity on Day 1 while preventing value leakage for either buyer or seller. This section explains how to calculate a fair working-capital target, unwind intercompany cash arrangements, and stand up independent treasury operations.
Objectives
- Establish a normalized working-capital “peg” for purchase-price adjustments.
- Identify and eliminate non-recurring or parent-specific balance entries.
- Design cash-management processes and banking infrastructure for Day 1 independence.
Defining the Working-Capital Perimeter
- Accounts receivable tied to in-scope revenue.
- Inventory and work in progress attributable to the carve-out business.
- Accounts payable and accrued expenses that will move with the entity.
- Exclude parent-level items such as corporate tax accruals, dividends payable, and group treasury loans.
Normalizing Historical Working Capital
- Gather monthly balances for at least 24 months.
- Remove one-offs: litigation settlements, bonus true-ups, major write-offs.
- Adjust for seasonality by computing average of like-for-like months.
- Calculate Days Sales Outstanding (DSO), Days Inventory on Hand (DIO), and Days Payables Outstanding (DPO) for benchmark comparison.
Setting the Working-Capital Peg
- Use the average of the most recent 12-month normalized balances unless clear seasonality dictates otherwise.
- Document methodology in a “peg memo” shared with buyer; include sensitivity tables for DSO, DIO, and DPO shifts.
- Agree on true-up mechanics and settlement timing (typically 60–90 days post-close).
Cash Pooling and Intercompany Balances
- Identify sweeping or cash-pooling arrangements the parent runs.
- Confirm daily cash-targets that will no longer be swept post-close.
- Reconcile and settle intercompany loans or cash advances before legal close; obtain board resolutions where required.
Day 1 Treasury Set-Up
- Open local and foreign-currency bank accounts in each operating jurisdiction.
- Establish new signatory matrices and payment approval limits.
- Implement interim cash-management TSAs if the buyer lacks treasury infrastructure.
- Secure short-term credit lines or a revolving facility to cushion post-close liquidity swings.
Cash-Flow Forecasting
- Build a 13-week rolling cash-flow model starting 8 weeks before close.
- Include detailed assumptions for receivables collection curves, supplier payment terms, payroll cycles, and tax outflows.
- Stress-test for 10 % revenue shortfall and 10-day payment delay scenarios.
Deliverables Checklist
- Working-capital historical analysis workbook.
- Peg memo with calculation logic and buyer negotiation points.
- Intercompany balance reconciliation and settlement plan.
- Day 1 banking set-up schedule with account numbers, signatories, and cutover timing.
- 13-week cash-flow forecast with sensitivity analysis.
Common Pitfalls
- Overlooking slow-moving inventory that requires revaluation.
- Leaving parent-level accruals in the carve-out balance sheet, inflating the peg.
- Failing to resolve intercompany cash positions, leading to post-close disputes.
- Inadequate liquidity buffer when the carve-out loses access to parent cash pooling.
A disciplined approach to working-capital adjustments and cash management safeguards deal value, prevents post-close cash crunches, and provides buyers with confidence that the carve-out can fund its operations from Day 1.
