Sandra,
I hope you're well. I'm writing to provide a detailed update on the net working capital provisions in the Allegheny Valley Packaging acquisition and to flag several areas of divergence between our draft and Seller's counter-proposal that will need resolution before the May 28 deadline.
**Matter Reference:** Calderwood & Harkness Matter No. 1006-00006
As you know, our draft APA circulated on May 2 included the NWC adjustment mechanism for Crestline Packaging Solutions LLC's acquisition of substantially all assets of Allegheny Valley Packaging, Inc. We have now received comments and a counter-proposal on the NWC provisions from Seller's counsel at Broadmoor Strauss & Kline LLP (Nathan Feldstein and Carolyn Ng). Below, I summarize the current state of the discussion, identify the key areas of disagreement, and set forth our recommended approach ahead of the May 28, 2025 target agreement deadline established in the LOI executed April 10, 2025.
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**1. Buyer's Proposed NWC Target and Methodology**
Our draft APA proposes a Net Working Capital target of **$12,400,000**, derived from AVP's trailing 12-month average NWC. This figure is based on monthly NWC calculations over the prior 12 months using AVP's historical financial statements, as reviewed by Hargrove Thornton LLP (Steven Raines's engagement team) in connection with their financial due diligence.
NWC is defined as current assets minus current liabilities, with the following specific inclusions and exclusions:
*Included Current Assets:* - Accounts receivable - Inventory - Prepaid expenses
*Included Current Liabilities:* - Trade accounts payable - Accrued expenses
*Excluded Items (consistent with the deal structure):* - Cash and cash equivalents (Excluded Asset under the APA) - Current portion of AVP's ~$14,200,000 revolving credit facility with Merchants & Traders Bank (Excluded Liability / pre-closing indebtedness to be paid off at closing) - Income tax receivables and payables (pre-closing tax liabilities are Excluded Liabilities) - Transaction Expenses of Seller
NWC is to be calculated as of 11:59 PM ET on the day immediately preceding the Closing Date.
Importantly, the APA specifies that NWC will be determined in accordance with GAAP as historically applied by AVP, consistent with the methodology used by Pendleton & Sawyer CPAs LLP (AVP's auditors) in preparing AVP's audited financial statements. I want to emphasize the importance of locking in a detailed "Accounting Principles" definition in the APA — this is our primary protective mechanism against post-closing disputes over how individual line items are calculated.
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**2. Collar / De Minimis Adjustment Threshold**
Our draft proposes a **±$250,000 collar**, meaning no purchase price adjustment would be triggered if Closing NWC falls within the range of $12,150,000 to $12,650,000. If Closing NWC exceeds the target by more than $250,000, Buyer pays the excess dollar-for-dollar to Seller. If Closing NWC falls below the target by more than $250,000, Seller reimburses the shortfall dollar-for-dollar to Buyer.
This is structured as a true collar — only the amount outside the collar band triggers an adjustment (i.e., it is not a tipping mechanism where exceeding the threshold results in a full dollar-one adjustment).
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**3. Seller's Counter-Proposal**
Broadmoor Strauss & Kline has pushed back on several points:
**(a) Target Amount.** Seller proposes a higher NWC target of approximately **$13,100,000**. Seller's position is that the trailing 12-month average should exclude certain months — specifically months reflecting seasonal troughs in Q4 2024 — which Seller contends were anomalous and not representative of the going-concern level of working capital needed to operate the business. Seller argues the "normalized" figure better reflects the true NWC requirement.
**(b) Collar Width.** Seller has proposed widening the collar to **±$500,000**, which would reduce the likelihood of any post-closing adjustment. As a practical matter, a wider collar effectively shifts risk to Buyer by allowing Seller to deliver less working capital at closing without triggering a dollar-for-dollar price reduction.
**(c) Inventory Valuation Methodology.** Seller wants to lock in the current FIFO methodology with no adjustment for obsolete or slow-moving inventory reserves. While AVP's controller (Diane Pulaski) has historically been conservative on reserves, Hargrove Thornton has flagged approximately **$600,000** in potentially excess or obsolete inventory that may warrant additional reserves. This is a meaningful item — if inventory is overstated at closing, the NWC calculation would be inflated, and Buyer would effectively overpay.
**(d) Dispute Resolution.** Seller has proposed that any NWC dispute be submitted to an independent accounting firm. This is not substantively different from our draft, which provides for submission to an independent accounting firm mutually agreed upon, with cost-sharing based on the prevailing party. The differences here are procedural and should be readily negotiable.
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**4. Hargrove Thornton's Diligence Findings Relevant to NWC**
Steven Raines's team at Hargrove Thornton has completed their financial diligence analysis, and their findings generally support the **$12,400,000** trailing 12-month average. However, H&T identified several adjustments that should be explicitly reflected in the NWC definition and Accounting Principles exhibit:
- **Inventory reserve adjustment:** As noted above, H&T identified ~$600,000 in excess or obsolete stock that may be under-reserved. - **Under-accrued liabilities:** Certain accrued liabilities appear to have been under-accrued in recent periods, with H&T estimating the shortfall at approximately **$150,000–$200,000**. - **Intercompany receivables/payables:** Several intercompany items running through AVP's books relate to personal expenses of the Horvath family. This is a common issue in family-owned S-corporations, and these items need to be explicitly excluded from the NWC calculation.
My strong recommendation is that the APA's NWC definition and the accompanying Accounting Principles exhibit explicitly address each of these items. Ambiguity here is an invitation for post-closing disputes.
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**5. Interaction with Other Deal Terms**
A few points on how the NWC adjustment interacts with other provisions of the APA:
- The **$9,000,000 escrow** (5% of the $180,000,000 purchase price) deposited with Atlantic Fiduciary Trust Company serves as security for indemnification claims generally and is subject to an 18-month release schedule. The NWC adjustment is a **separate mechanism** with its own true-up timeline (typically 60–90 days post-closing). The two should not be conflated, and the APA language should be clear that the NWC true-up operates independently of the escrow. - The NWC adjustment flows through the purchase price and is **not subject to** the indemnification basket ($1,350,000) or cap ($45,000,000). This is standard market practice, but we should confirm that the APA language unambiguously carves the NWC adjustment out of the indemnification framework. - AVP's **S-corporation status** means the NWC true-up has tax implications at the shareholder level (Gerald Horvath 72%, Patricia Horvath 18%, Michael Horvath 10%). Leonard Cross on our tax team is aware of this and will coordinate with Seller's counsel on the tax treatment of any adjustment.
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**6. Recommended Approach**
Based on the foregoing, I recommend the following:
1. **Hold the line on the $12,400,000 target.** The trailing 12-month average is market-standard and fully supported by Hargrove Thornton's analysis. Excluding seasonal trough months would cherry-pick the data and artificially inflate the target. I recommend rejecting Seller's $13,100,000 proposal.
2. **Maintain the ±$250,000 collar.** Widening to ±$500,000 creates too much leeway and is not consistent with collars in comparable deals of this size. The ±$250,000 collar is proportionate — approximately 2% of target NWC — and well within market norms.
3. **Insist on inventory reserve language.** The NWC definition should include a provision requiring inventory to be valued net of appropriate obsolescence and slow-moving reserves, calculated consistently with past practice and supplemented by the adjustments identified by Hargrove Thornton. This is critical given the $600,000 H&T finding.
4. **Prepare a detailed Accounting Principles exhibit.** This should be attached as a schedule to the APA and should specify, on a line-item basis, the valuation methods, reserve methodologies, and exclusions (cash, indebtedness, intercompany items, tax-related items, Transaction Expenses). In my experience, this exhibit is the single most important protective mechanism in post-closing NWC disputes.
5. **Timeline.** The LOI contemplates agreement on target NWC by May 28, 2025. I would suggest scheduling a call this week or early next week with you, Priya Mehta, and potentially Steven Raines from Hargrove Thornton to finalize our position before we respond to Seller's counsel.
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**Attachments and References**
For your reference, I am circulating separately the NWC analysis spreadsheet prepared by Hargrove Thornton LLP showing the monthly NWC calculations for the trailing 12-month period. You may also wish to review the relevant sections of our draft APA (Section 2.6 — Purchase Price Adjustment) alongside Seller's mark-up received from Broadmoor Strauss & Kline, which I circulated last Thursday.
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Sandra, I'd very much like to schedule a call later this week or early next week to walk through these points and align on our approach before the May 28 deadline. Harrison is copied here and is available to discuss as needed. Once the team is aligned, I will prepare a revised NWC section and a draft Accounting Principles exhibit for circulation to Seller's counsel.
Please let me know your availability, and I'll coordinate.
Best regards,
Megan Chu Associate Calderwood & Harkness LLP 600 Lexington Avenue, 30th Floor New York, NY 10022 Direct: (212) 554-7183 Mobile: (917) 482-0916 mchu@calderwoodharkness.com
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