Working Capital Adjustments in a Business Acquisition
A working-capital adjustment compares qualifying closing working capital with an agreed target or peg. If closing working capital is above or below the target, purchase price changes under the agreement. The parties must define included accounts, accounting principles, measurement time, estimates, true-up procedure and dispute process before closing.
Define the metric before setting the target
- A common starting point is specified current operating assets minus specified current operating liabilities.
- Cash, debt, taxes, transaction expenses, deferred revenue, owner items and nonoperating balances require explicit treatment.
- Use the same account definitions and accounting policies across historical and closing calculations.
Build a defensible peg
- Analyze monthly balances across a period that captures seasonality and growth.
- Review unusual collection, inventory, purchasing, payroll, bonus and payment timing.
- A simple average can mislead when the business is seasonal or rapidly changing.
Prepare the closing estimate and true-up
- Specify who prepares the estimate, the information required and the deadline.
- Define access rights, objection periods, independent-accountant procedures and materiality rules.
- Keep the working-capital adjustment separate from debt, cash, leakage, indemnity and purchase-price allocation unless the agreement states otherwise.
Watch for manipulation and double counting
- Accelerated collections, delayed payables, inventory reductions and unusual accruals can distort the closing result.
- Do not adjust twice for the same economic item through both normalized earnings and working capital.
- Use a sample calculation in the agreement when account treatment is complex.
Decision checklist
Frequently asked questions
What is a working capital peg?
It is the agreed target level of defined working capital that the seller is expected to deliver at closing.
Is cash included in working capital?
Often cash is excluded in cash-free, debt-free transactions, but the agreement controls. Do not assume.
How is seasonality handled?
Use matched historical periods, monthly trends and business-specific operating cycles rather than relying only on an annual average.
Who resolves a dispute?
Agreements commonly define negotiation and an independent-accountant process, including scope, deadlines and allocation of costs.
Primary sources and further reading
Methodology reviewed 2026-09-26. Educational information only. Transaction, lending, tax, accounting and legal outcomes depend on the facts and current rules; use qualified advisers.