Working Capital Adjustments: The Most Common Way Deals Get Re-Traded
If there’s one deal term that causes more post-closing disputes than almost any other, it’s the working capital adjustment.
This post explains how working capital adjustments function in business sales, why they exist, and how unclear definitions often turn them into leverage points and sources of dispute.
What Is a Working Capital Adjustment?
A working capital adjustment (or “true-up”) shifts the purchase price based on the company’s net working capital at closing compared to an agreed target (or peg).
- If actual working capital is below the peg, the price usually goes down
- If it’s above the peg, the price goes up
The concept sounds simple. The execution rarely is.
How the Peg Is Set
The peg is typically based on a normalized historical average, adjusted for:
- seasonality
- growth trends
- how the business actually operates
- accounting policies used historically
Disputes arise when the peg doesn’t reflect reality — or when definitions are vague.
What Counts as Working Capital?
The purchase agreement must define:
- what counts as “current assets”
- what counts as “current liabilities”
- how cash, reserves, accruals, and deferred items are treated
Small definitional changes can move the price by six figures.
Working Capital Adjustments Are About Incentives, Not Accounting
Buyers want to receive a business that can operate normally on Day 1 — not one starved of liquidity or artificially propped up for closing. Sellers, in turn, want to avoid price erosion caused by shifting assumptions or aggressive post-closing accounting.
A properly designed working capital adjustment is meant to neutralize incentives on both sides. When definitions are clear and the peg is reasonable, it discourages short-term manipulation and preserves value. When it’s sloppy, it becomes a leverage tool instead.
The Practical Takeaway
Working capital isn’t a technical footnote. It’s part of the price.
Experienced counsel focuses on it early — before it becomes a post-closing fight.
