THE SHORT ANSWER
A working-capital target sets an agreed level of specified operating assets and liabilities to accompany the business. Under a closing-adjustment mechanism, delivery above or below that target can change price. The contract defines the accounts, accounting policies and dispute process. There is no universal target that applies to every business sale.
Define the accounts before debating the target
A transaction definition may use receivables, inventory and selected operating liabilities, while excluding cash, debt or other separately adjusted items. Another deal may handle inventory separately. Read the actual definition: balance-sheet working capital and transaction working capital need not match.
BDO identifies unclear definitions and accounting methods as potential sources of post-close disputes.
(BDO: preventing post-acquisition disputes)Create an account-by-account schedule showing inclusion, exclusion, valuation policy and supporting evidence. Include deposits, deferred revenue, accrued expenses and taxes in the discussion rather than assuming they fall into the same category in every deal.
Work through a signed numerical example
| Hypothetical closing item | Amount |
|---|---|
| Agreed target | $150,000 |
| Included receivables | $120,000 |
| Included inventory | $80,000 |
| Included payables and accruals | ($70,000) |
| Delivered transaction working capital | $130,000 |
| Adjustment if contract is dollar-for-dollar | ($20,000) |
The adjustment is $130,000 minus $150,000. Do not deduct the same inventory, liability or debt again elsewhere in the closing bridge. For cash or debt adjustments, use separate rows and reconcile them to the agreed definition of purchase price.
Check seasonality and accounting consistency
A target based on an average of historical months can produce a different result from a seasonally matched period. Review the monthly schedule, business cycle and expected closing date. Ask whether unusual buying, collection or payment patterns distorted the historical period.
- How are old receivables and doubtful accounts valued?
- What identifies obsolete or slow-moving inventory?
- Are unpaid invoices and accrued expenses complete?
- How are customer deposits and unfulfilled obligations treated?
- Which accounting policies take precedence if they differ?
Use a specimen calculation based on the intended policies. Agreement on an attractive target number is incomplete if the delivery calculation remains ambiguous.
Agree the true-up process and reserve for uncertainty
Ask who prepares the estimated closing statement, when the final calculation is due, how records can be inspected, how long objections may be raised and how disputed amounts will be decided. Counsel and accounting advisors should align those terms with the financial schedules.
A post-close true-up may affect proceeds after you have handed over control. Model the expected adjustment and a downside adjustment separately in the proceeds planner; it accepts a signed net adjustment but does not determine which accounts belong in the calculation.
Before accepting an offer, request a bridge from headline price through cash, debt, working capital, holdbacks and fees. A lower target is not automatically a better deal if the price or other provisions change with it.
Owner questions
Does the seller keep every receivable?
It depends on the agreed transaction perimeter. Some asset sales exclude receivables; other transactions include them in working capital.
Is cash normally included?
Do not infer inclusion from general usage. Many deal definitions treat cash separately, but the signed terms control.
Can I avoid a closing adjustment entirely?
Alternative mechanisms may be negotiable, but they have their own terms and risks. Discuss the appropriate structure with your advisors.
Sources and review scope
Source review completed . The sources below support the identified concepts or rules; they do not validate hypothetical amounts or a valuation of your business.
- BDO: preventing post-acquisition disputes
Working-capital definitions, earnout measurement and agreement drafting.
Confirm tax, legal, accounting and lending applications with the relevant professionals. Historical market observations describe the stated period and reported sample.
This is educational material. Industry figures and program rules can change; check the original sources and your advisors before applying them to a transaction. Calculator scenarios are not appraisals, lending decisions, or offers.
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