Working Capital Holdback
Definition - 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.
Divestopedia explains Working Capital Holdback
If a purchase and sale agreement contains a working capital requirement, it most likely will include a working capital holdback. Typically, if the final net working capital delivered is below the threshold, then the holdback will be released, minus the deficiency. Therefore, it is critical to ensure that net working capital is accurate so that when it is reviewed, the working capital amount matches to the peg, and the holdback can be released quickly. Buyers usually hold back a portion of the purchase price for up to 120 days in order to audit the level of working capital delivered.