How to construct an NWC bridge in Financial Due Diligence: methodology, components, peg calculation and integration into the EV/Equity bridge.
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.
The NWC bridge is a structured analysis that:
This adjustment flows directly into the EV/Equity bridge as a pound-for-pound modifier to equity value.
Working capital in the FDD context is operating working capital only:
Assets (increase in NWC):
Liabilities (decrease in NWC):
Explicitly excluded:
Before calculating anything, agree the perimeter. Which entities are included? What accounting policies govern the recognition of each NWC component?
For each component, extract monthly balance sheet data over 24-36 months. This gives you the raw material for normalisation.
Track these monthly to identify trends and anomalies.
Common anomalies:
Exclude or normalise these points before calculating the peg.
Use the 12-month rolling average (or closing-month average over prior years for seasonal businesses). This becomes the contractual peg.
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.
The NWC bridge section typically includes:
The programme's Excel models include a ready-to-use NWC bridge template that you can apply directly to the case study data sets.
Hundreds of candidates prepared their interviews with this programme. Those who landed the role have one thing in common: they worked the cases before walking into the room.
