Selling a Business

The Working-capital Peg and the True-up

Understand the second price negotiation — the one that happens after you agree the first — and learn how a choice of averaging period, an accounting principles hierarchy, and a single debt-like item can move seven figures.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: How the working capital target is set, what the closing statement and dispute mechanism should say, and which line items to fight over.

What this topic is

The mechanics of the working capital adjustment in a private company sale: how a normalised target is derived, how the estimated and final closing statements work, how the post-closing true-up is calculated and disputed, and how debt-like items interact with the calculation. It covers the drafting that determines who wins each of those questions.

Why it matters

The purchase price in a letter of intent is negotiated with competing bidders present. The working capital peg is negotiated during exclusivity, with no alternative, by people who describe it as a technical matter. It routinely moves proceeds by more than the last round of price negotiation did, and because it is presented as accounting rather than economics, sellers frequently delegate it to someone who is not thinking about the dollars.

Who should learn it

Owners, CFOs, and advisers negotiating a purchase agreement, and anyone whose letter of intent contains the phrase "customary working capital adjustment."

What you will understand

  • Why a peg exists at all, and what it is supposed to protect against
  • How the target is derived, and how averaging period, seasonality, and definition choices move it
  • The accounting principles hierarchy — the single most litigated sentence in the mechanism
  • How the true-up, the escrow for it, and the independent accountant referral actually work

Prerequisites

Common misconception

"The working capital adjustment is neutral — it just trues up timing differences." It is neutral only if the target equals the level the business genuinely needs and the definitions are symmetric. Neither is automatic. A target set on an averaging period that includes an atypical build, or a definition that includes deferred revenue on one side and excludes a corresponding asset on the other, is a straightforward transfer of value dressed as a mechanical adjustment.