Building an NWC Bridge in Transaction Services

An NWC bridge — the analysis that quantifies the working capital adjustment in a transaction — is a core deliverable of any FDD engagement. Here's how to build one correctly.

What is the NWC bridge?

The NWC bridge is a structured analysis that:

1. Calculates the normalised NWC peg (the target level of working capital the business should be delivering at closing).
2. Compares the peg against actual NWC at closing.
3. Calculates the price adjustment: if actual NWC is below the peg, the buyer receives a reduction; if above, the buyer pays more.

This adjustment flows directly into the EV/Equity bridge as a pound-for-pound modifier to equity value.

Components of operating NWC

Working capital in the FDD context is operating working capital only:

Assets (increase in NWC):

• Trade receivables (net of bad debt provisions)
• Inventories (finished goods, WIP, raw materials)
• Prepaid expenses and other operating current assets

Liabilities (decrease in NWC):

• Trade payables
• Accrued expenses
• Deferred revenues (operating)
• Other operating current liabilities

Explicitly excluded:

• Cash and short-term investments (these are in net debt)
• Current tax liabilities (tax-related current balances are typically excluded)
• Current financial debt (in net debt)
• Dividends payable (debt-like item)

Step-by-step NWC bridge construction

Step 1: Define the perimeter

Before calculating anything, agree the perimeter. Which entities are included? What accounting policies govern the recognition of each NWC component?

Step 2: Build the monthly NWC series

For each component, extract monthly balance sheet data over 24-36 months. This gives you the raw material for normalisation.

Step 3: Calculate DSO, DPO and DIO

• DSO = (Trade receivables / Revenue) × 30
• DPO = (Trade payables / Purchases) × 30
• DIO = (Inventories / COGS) × 30

Track these monthly to identify trends and anomalies.

Step 4: Identify anomalies and exclude them

Common anomalies:

• Unusually high DPO in the last 2-3 months (payables stretched pre-sale).
• Unusually high receivables in December (revenue pulled forward).
• Inventory spikes for specific periods (seasonal, or one-time buy-in).

Exclude or normalise these points before calculating the peg.

Step 5: Calculate the normalised NWC peg

Use the 12-month rolling average (or closing-month average over prior years for seasonal businesses). This becomes the contractual peg.

Step 6: Compare against closing NWC

If the business is sold on actual NWC at closing (completion accounts mechanism), compare actual to peg. If the gap is material, it affects the equity price.

Presenting the NWC bridge in the FDD report

The NWC bridge section typically includes:

• A chart of monthly NWC (absolute and in days of revenue).
• DSO/DPO/DIO charts with trend lines.
• A table showing the normalised NWC calculation.
• Commentary on anomalies and their impact.
• The recommended peg and the basis for its determination.

The programme's Excel models include a ready-to-use NWC bridge template that you can apply directly to the case study data sets.