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💰 '''Net working capital target''' is a benchmark figure agreed upon during an insurance [[Definition:Mergers and acquisitions (M&A) | M&A]] transaction that represents the expected level of short-term operating liquidity — current assets minus current liabilities — the target company should deliver at closing. In insurance deals, this metric carries particular complexity because an insurer's or [[Definition:Managing general agent (MGA) | MGA's]] balance sheet includes items such as [[Definition:Premium receivable | premiums receivable]], [[Definition:Unearned premium reserve | unearned premium reserves]], [[Definition:Loss reserve | loss reserves]], reinsurance recoverables, and agent commission payables, all of which fluctuate with the [[Definition:Underwriting cycle | underwriting cycle]] and policy timing. The buyer and seller negotiate the target during the [[Definition:Letter of intent (LOI) | letter of intent]] or [[Definition:Share purchase agreement (SPA) | purchase agreement]] phase, typically pegging it to a normalized average derived from recent monthly or quarterly balance sheets.

📊 Once the parties lock in the target, the [[Definition:Purchase agreement | purchase agreement]] specifies a true-up mechanism that compares estimated net working capital delivered at closing against the agreed target. If the actual figure falls short, the [[Definition:Purchase price | purchase price]] is adjusted downward dollar-for-dollar; if it exceeds the target, the seller receives the surplus — though many deals include a collar or de minimis band to avoid disputes over immaterial swings. For insurance entities, the calculation often requires careful treatment of items unique to the sector: deciding whether [[Definition:Claims reserve | claims reserves]] sit inside or outside working capital, handling [[Definition:Fiduciary fund | fiduciary funds]] held on behalf of policyholders, and distinguishing between earned and [[Definition:Unearned premium | unearned]] premium components. Advisors on both sides typically prepare detailed schedules and agreed-upon accounting policies well before closing to minimize post-completion disagreements.

⚖️ Getting this number right is critical because it directly protects the buyer from receiving a business that has been drained of operating liquidity before the handover — a risk that is especially acute in insurance, where premium cash flows can be redirected, claim payments accelerated, or commission settlements delayed to artificially inflate short-term cash positions. Conversely, sellers want assurance that routine seasonal or cyclical fluctuations in insurance working capital will not trigger unwarranted price reductions. A well-crafted net working capital target, supported by transparent schedules and a robust dispute-resolution mechanism, reduces the likelihood of post-closing [[Definition:Purchase price adjustment | purchase price adjustment]] litigation and helps both parties transition ownership smoothly.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Purchase price adjustment]]
* [[Definition:Locked-box mechanism]]
* [[Definition:Completion accounts]]
* [[Definition:Closing condition]]
* [[Definition:Earn-out]]
* [[Definition:Share purchase agreement (SPA)]]
{{Div col end}}

Definition:Net working capital target - Revision history

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