A working-capital target can turn a headline purchase price into a different closing payment. Know the definition, the target, how it’s measured and how disputes get settled before you treat the offer as money in hand.
The short answer
Many transactions are priced on a cash-free, debt-free basis with an agreed level of normalized working capital delivered at closing. If measured working capital is below the target, the purchase price may be reduced; if it is above the target, the price may increase—subject to the agreement.
There is no universal formula. The definition of included current assets and liabilities, accounting policies, seasonality, unusual balances, and post-close true-up mechanics are negotiated transaction terms. A working-capital peg is the agreed target, not an extra amount the seller automatically receives.
Questions to consider
Identify which of these are included or excluded:
Labels in the financial statements do not automatically control the deal definition.
The target may use a trailing average, seasonal period, budget, normalized level, or another negotiated method. Hypothetical dollar-for-dollar adjustment: an agreed $1.2 million target and $1.05 million delivered at closing produce a $150,000 reduction; delivering $1.35 million produces a $150,000 increase. This illustration assumes the agreement permits symmetric adjustments and no cap, collar, or other exception. Test whether the target reflects operations at the expected closing date.
Specify:
Small accounting changes can produce large closing adjustments.
These balances may be argued as debt-like or working capital:
Resolve classifications before the closing statement.
These can change the amount credited:
Owners should understand whether the buyer’s quality assumptions match operating reality.
Know who prepares the estimated and final closing statements, the review period, access to records, objection procedure, independent accountant process, materiality thresholds, and whether an escrow secures the adjustment.
Before the closing statement
Use the exact definition and historical balance sheets to calculate the target and likely closing position.
Mark reserves, inventory, deferred revenue, bonuses, accruals, and debt-like items where the parties may apply different assumptions.
Compare how the expected closing month affects inventory, receivables, payables, customer deposits, and cash needs.
Show these in one proceeds bridge:
Keep each balance in one category: counting the same liability as both debt-like and working capital can reduce proceeds twice. Ask the deal team to reconcile the definitions and the closing statement.
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