Is this in the context of an M&A and deciding working capital purchase price adjustments? If so, we would ask: When is this business being acquired - specifically when is deal closing? Is closing going to coincide at what part of the inventory build cycle? i.e. at the absolute low inventory (righ... Is this in the context of an M&A and deciding working capital purchase price adjustments? If so, we would ask:

When is this business being acquired - specifically when is deal closing? Is closing going to coincide at what part of the inventory build cycle? i.e. at the absolute low inventory (right after holiday season perhaps), beginning of inventory build (say mid to end of quarter 1) or at the peak inventory (usually at beginning of quarter 4, before holiday season). The way we would approach this question is to figure out if the inventory build is natural over the entire year or or quick increase in inventory? Either way, what we're trying to get at is to figure out if the inventory build should be already subsidized by the normal year's working capital throughout the year.

Regarding employee bonuses, this is supposed to be a non-factor because one is supposed to be accruing bonuses (i..e expensing on IS month to month). Just like how you would consider prepaid assets to be part of you working capital calculation, the opposite, in this case, deferred compensation or possibly compensation payable, would also be included as part of the working capital calculation. If the company has NOT yet been accruing bonuses over the year, then this is pretty straightforward we think - make the accrual for bonuses now, so basically the seller is responsible for bonuses up until deal closing, and the acquirer is responsible for bonuses after deal closing through the end of the year and then beyond. Read More

Let's say that the deal is closing at peak inventory (beginning of quarter 4, before the holiday season); if this were the case, should the LTM average net working capital be used or should a higher target be used given the expected seasonal increase in working capital?

If I'm the seller and you want a greater working capital requirement (i.e. deduction to purchase price), then I would respond and say, ok I spent all that money and I don't get the benefit of that once you presumably sell the inventory during Q4. If I'm the acquiror, I'd make the opposite case s... If I'm the seller and you want a greater working capital requirement (i.e. deduction to purchase price), then I would respond and say, ok I spent all that money and I don't get the benefit of that once you presumably sell the inventory during Q4.

If I'm the acquiror, I'd make the opposite case saying that you have to give me a business that is already "complete" and if I have to put in more money for Q4 inventory then that's really adding to purchase price.

However, next Q4, the acquiror has to do the same anyway, that is, put in more money for next holiday season. In our opinion, whomever puts the money in should be beneficiary of that operating cycle and its economic benefit. Read More