NWC target (peg): "Like buying a car with sufficient gas to drive off the parking lot. But, what’s sufficient?"
It’s a zero-sum game: Seller wants a lower target vs. Buyer wants a higher target.
Purchase Price = EV + Cash - Debt + (Actual NWC - Target NWC)
NWC often swings the total valuation by 5%.
What to triage:
• 3 last closing dates (example: if closing is Sept 30, then look at what the balance sheet was on that date in the last 3 years).
• Average balance sheet for L3M, L6M, and especially TTM. A forward-looking estimate can be justified with high growth & high valuation.
• Match the valuation period (EBITDA multiple based on 3yrs? Then NWC shouldn't be 6 months...)
(I learned this from Dara Shareef.)
