working capital adjustment
Working capital adjustment protects buyers and sellers at closing. It adjusts the deal price if short-term assets or liabilities differ from a target baseline, keeping the transaction fair.
What is a working capital adjustment
A working capital adjustment is a financial correction made at the closing of a deal. It ensures that the target company delivers a normalized level of net working capital, usually based on a benchmark negotiated during the deal. This benchmark reflects the company’s regular business needs and prevents either party from gaining or losing unfairly due to short-term fluctuations.
This mechanism is common in mergers and acquisitions. It aligns the interests of buyers and sellers by adjusting the purchase price if the actual working capital differs from the agreed-upon level at closing. If the working capital is lower than expected, the seller compensates the buyer. If it’s higher, the buyer may pay extra. It sounds simple, but the devil is in the details.
Unlike one-off valuation metrics, a working capital adjustment is dynamic. It connects directly to how the company operates. Inventory, receivables, payables—these aren’t just accounting lines. They reflect how money flows through the business. That’s why this adjustment is more than a technicality. It protects both parties from unexpected shifts in liquidity right before the transaction closes.
Real-world example in dealmaking of working capital adjustment
Let’s say you’re buying a software company with a typical net working capital of $2 million. You agree on that baseline during negotiations. But at closing, the balance sheet shows only $1.4 million. Maybe the seller collected receivables faster than usual or delayed paying suppliers. Either way, the company now has less working capital to support ongoing operations.
Here’s where the working capital adjustment kicks in. The $600,000 shortfall would reduce the purchase price, ensuring the buyer doesn’t overpay for a business that’s temporarily undercapitalized. This avoids disputes and maintains the economic integrity of the deal. For experienced operators, it’s a non-negotiable clause.
Now flip the script. What if working capital comes in higher than expected? That could mean the seller pumped cash into the business to boost appearances. Or it could be legitimate growth. Either way, the buyer pays the difference—if and only if the contract was drafted with precision.
This is why great deals don’t just depend on price. They depend on clarity. And working capital adjustment clauses are a good stress test for how seriously both sides take operational reality.
Misconceptions to avoid
Some founders think of working capital as “cash,” and that’s a costly mistake. It’s not about cash in the bank. It’s about the capital tied up in running the business. Receivables, inventory, payables—these move daily. Misjudging their impact can lead to painful post-deal surprises.
Others assume it’s just a finance team detail. It’s not. Operational leaders need to understand how their decisions affect working capital in the months before a transaction. Holding back invoices or accelerating payments to game the numbers will always backfire.
A good rule of thumb: if it smells like manipulation, the other side will notice. And they’ll call it out in the adjustment process.
A strategic detail that protects real value
If you’re preparing for a sale, don’t treat the working capital adjustment as legal fine print. It’s operational reality, translated into financial language. And it can shift millions. Clarity, transparency, and a well-defined benchmark protect everyone involved.
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