Net Operating Working Capital (NOWC)
Definition - What does Net Operating Working Capital (NOWC) mean?
Divestopedia explains Net Operating Working Capital (NOWC)
Buyers often peg a certain level of NOWC to be part of the net tangible assets left in the business. For example, assume a target has revenue of $10 million, EBITDA of $2 million, and average NOWC of $500,000 over the last 12 months. A buyer is looking to buy this business at a multiple of 4x TTM EBITDA of $8 million. The company has capital assets required to operate the business with a fair market value of $3 million.
The buyer may write into the purchase and sale agreement the requirement for tangible asset value to be no less than $3.5 million (the capital assets + the average NOWC), with any amount or below at closing adjusted dollar for dollar from the cash consideration. this is because if NOWC is less than the average of $500,000, the buyer knows that an additional investment (in the form of equity or debt) will be required to build up the NOWC to its average in order to sustain the $10 million of revenue.
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