What Does Working Capital Holdback Mean?
A working capital holdback specifically deals with the amount of working capital that must be delivered by the selling company at the closing date. Sophisticated buyers estimate the average level of working capital required by a company to service its expected annual revenue. The buyers then peg this working capital and require the seller to deliver the pegged amount as part of the transaction. If the pegged working capital is not delivered, it means the buyer will be required to inject additional funds into the company to carry operations post-transaction.
The working capital holdback is used to allow for any shortfall from the pegged working capital, or to provide some security for the buyer until the working capital numbers have been properly audited post-transaction.