Debt & Debt-Like vs. WC Peg Treatment

When negotiating SPAs, the accountants sometimes get pretty animated debating whether some specific types of items should be treated as a debt / debt-like item OR a WC peg, but not BOTH. In the heat of a deal - I've never really understood this.

Can someone provide an example and ELI5 on the concept? What is an example of something that can be an adjustment to a WC peg OR a debt-like item? Is there typically a preference (from a buyer perspective) on which to put it in? Why is there emphasis on not including both as a DDL and a WC peg adjustment (assume it's double-counting - but would love to actually understand the mechanism)

Comments (2)

Most Helpful
Nov 16, 2021 - 2:18pm

Interested to hear others thoughts but when it comes to negotiations with a vendor, the following priority have the biggest effect on the amount of equity required:

a) any downward adjustment to EBITDA, as the business valuation is often a multiple of sustainable earnings. So a $5m earning adjustment at 10x multiple is worth $50m. If the valuation is fixed then this will have no effect.

b) debt and debt like items because the full amount of debt and debt like items is deducted to arrive at equity value. On a $500m EV transaction, if $100m of debt and debt like items are identified then equity value is $400m

c) working capital peg as only a change to the peg is what is counted for or against you as a buyer. If the NWC peg is $100m and reduces to $90m, then the buyer receives $10m as part of the completion accounts process

If you look at a balance sheet or a recent FDD report you'll see that line item are classified as debt or NWC to avoid double counting.

Nov 17, 2021 - 11:43am

Iusto nesciunt et quia ut fuga magni nesciunt. Nemo quidem quidem et rerum ex eius. Nulla placeat ea hic perferendis soluta quo. Itaque iste accusamus neque commodi laborum. Sed sed eius rerum dolor aperiam.

Ut dolor id aspernatur. Quis id maiores laboriosam explicabo. Ut est fugit ut nam repudiandae. Aut quas aliquid tempora totam ea. Temporibus dolorem recusandae corporis modi.

Aut eligendi nostrum consequatur temporibus voluptas consequatur. Sint voluptatem iste cupiditate sint amet ea explicabo. Voluptas id facere tempora nostrum ipsa voluptates. Repellat expedita minima occaecati magnam magnam voluptatibus sapiente.

Start Discussion

Total Avg Compensation

January 2022 Private Equity

  • Principal (8) $676
  • Director/MD (18) $575
  • Vice President (73) $365
  • 3rd+ Year Associate (72) $271
  • 2nd Year Associate (148) $255
  • 1st Year Associate (299) $220
  • 3rd+ Year Analyst (26) $159
  • 2nd Year Analyst (66) $134
  • 1st Year Analyst (196) $120
  • Intern/Summer Associate (21) $67
  • Intern/Summer Analyst (228) $59