Software M&A price adjustment mechanism
Hi all,
Say you are buying a SAAS company with has a bunch of customers representing 80% of the revenue renewing at the same time (just before closing). Contracts are annual and multi annual prepaid and the company is not profitable and will require some extra spending to bring to profitability. It's the usual feast/famine cycle where the company makes its money in a quarter and spends it (and more) the rest of the year.
Target company has now cash on the account and bumped its DRs.
How do you calculate the NWC in such a case? How do you set the peg? (do you include the DRs or exclude them for the NWC?).
It would not be fair to the buyer to let the target walk away with the cash and leave the buyer foot the bill for the rest of the year knowing the target is already not a profitable entity.
More broadly: how do you guys treat DRs in the case of software M&A?
Thanks!
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