When two parties agree on a purchase price for a business, that number is rarely the final amount exchanged at closing. One of the most common reasons the actual payout differs from the agreed price is the working capital adjustment. It is a provision built into most business purchase agreements, and misunderstanding it can cost a buyer or seller a significant amount of money.
Working capital, at its most basic, is the difference between a company’s current assets and its current liabilities. Think of it as the fuel a business needs to operate day to day. When a sale closes, both parties want to make sure the business is handed over with an agreed level of operational resources, not stripped of cash or loaded with unexpected debt.
How the Adjustment Works
Most purchase agreements set a working capital target, sometimes called a peg. This target represents the amount of working capital the parties agree should be present in the business at the time of closing. The actual working capital is then measured at or near closing and compared to that target.
If the actual working capital comes in above the target, the buyer typically pays more. If it falls below, the seller owes the buyer a credit or payment. The mechanics look straightforward on paper, but the details create most of the disputes. A few of the common sticking points include:
- How current assets and liabilities are defined and categorized
- Whether certain items like deferred revenue, accrued expenses, or intercompany balances are included
- The accounting methods used to calculate inventory, receivables, or prepaid items
- The timing of the measurement and who prepares the closing balance sheet
These are not minor details. A difference in how one category is treated can shift the adjustment by tens of thousands of dollars or more.
Why This Matters for Buyers and Sellers
For buyers, the working capital adjustment is protection. You are paying for a business that should be able to operate without an immediate infusion of cash. If the seller drains receivables, delays vendor payments, or draws down inventory before closing, the buyer ends up funding operations out of pocket the moment the deal is done.
For sellers, the adjustment cuts both ways. Sellers who run the business conservatively and maintain strong working capital heading into closing may actually receive a higher payout than the base purchase price. On the other hand, sellers who are not paying attention to the target during the months before closing can find themselves writing a check after the deal closes.
A Wilmette business purchase lawyer can review the working capital definition in your purchase agreement before you sign anything. Getting this language right at the term sheet stage is far easier than disputing it post-closing.
What to Watch for in the Agreement
When reviewing a purchase agreement, pay close attention to how working capital is defined. The definition section of most agreements does the heavy lifting. Watch for whether the definition ties to GAAP accounting or some other standard, and whether there are carve-outs for specific balance sheet items.
Also look at the dispute resolution mechanism. If the parties disagree on the final calculation, who is the arbiter? How long does each side have to object? What documentation is required? These timelines are often short, and missing a deadline can waive important rights.
Kravets Law Group works with buyers and sellers on the transactional side of business acquisitions, including reviewing and drafting the financial provisions that often determine what money actually changes hands.
Getting the Numbers Right Before You Close
A working capital adjustment is not just an accounting exercise. It reflects the actual condition of the business at the moment of transfer, and the financial stakes are real. Both sides benefit from having legal counsel who understands how these provisions work and can spot problems in the language before closing day arrives.
If you are in the process of buying or selling a business in the Chicago area, speaking with a Wilmette business purchase lawyer early in the process gives you the best chance of closing on terms that actually reflect what you agreed to.