Why Working Capital Adjustments Catch Sellers Off Guard (And How to Prepare for Them)
- Mark Hartmann
- May 22
- 7 min read
When I sold my own company, I thought I had a good handle on how the sale would go. I knew the headline number, I understood the buyer, and we’d even agreed on most of the key terms in the letter of intent.
Then came the working capital adjustment.
I’ll be honest—I wasn’t fully prepared for it. I thought we were talking about the purchase price. But the buyer was looking at something called a working capital peg, and before I knew it, we were negotiating how much cash, accounts receivable, payables, and inventory needed to be in the business at closing.
If you’ve never sold a business before, this topic might sound like technical accounting—but trust me, working capital adjustments are one of the most common sources of confusion, frustration, and surprises in the M&A process.
And they directly impact how much you walk away with when the deal closes.
In this post, I’ll break down:
• What working capital is
• Why it matters in a business sale
• How the adjustment works
• Common pitfalls that catch sellers off guard
• What you can do to avoid last-minute surprises
Let’s start with the basics.
What Is Working Capital?
At its core, working capital is a measure of a company’s short-term liquidity. The simple formula is:
Working Capital = Current Assets – Current Liabilities
In the context of selling a business, the focus is usually on net working capital (NWC), which includes items like:
• Accounts receivable
• Inventory
• Prepaid expenses
• Accounts payable
• Accrued expenses
Cash is typically excluded from the calculation, since it’s not considered part of the operating capital needed to run the business (and sellers usually keep the cash).
Working capital is the fuel that keeps day-to-day operations running. It ensures the business can pay vendors, meet payroll, and fulfill customer orders without disruption.
Why Buyers Care About Working Capital
When a buyer acquires your business, they expect it to come with a normal, consistent level of working capital—enough to keep the business running smoothly after closing without immediately injecting more cash.
Think about it this way: if you pulled all the cash out of your company, collected receivables, delayed paying vendors, and let inventory run dry before handing over the keys, the buyer would be stuck scrambling on Day 1.
So buyers insist on a working capital target—also known as a working capital peg—that the business must meet at closing. If actual working capital is above the peg, you may get a bonus. If it’s below the peg, the purchase price gets reduced.
And that’s where the surprises can happen.
What Is a Working Capital Adjustment?
A working capital adjustment is a post-closing true-up. It compares:
• The actual working capital in the business at the time of closing
vs.
• The target (or “peg”) amount agreed upon in the purchase agreement
The difference between the two is settled with a payment—either from the buyer to the seller (if actual exceeds target) or from the seller to the buyer (if actual falls short).
These adjustments can swing tens or even hundreds of thousands of dollars. That’s why it’s so important to understand how they work—and prepare accordingly.
How the Working Capital Peg Is Determined
This is one of the most misunderstood parts of the deal.
Many sellers assume the buyer will simply use whatever working capital is on the books at the time of sale. But that’s not how it works.
The peg is usually calculated based on an average of monthly working capital over the past 12 months (sometimes more, sometimes less). The idea is to set a baseline that reflects a normal operating level.
For example, if your business typically carries $1.2 million in working capital, but it dipped to $800,000 in the two months before closing, the buyer may still expect the $1.2 million peg to be met.
If not? That shortfall could come out of your proceeds.
Why Working Capital Adjustments Catch Sellers Off Guard
1. Most Sellers Don’t Know It’s Coming
Unless you’ve sold a business before (or had a good advisor), you may never have heard of working capital adjustments. It’s not a term that shows up in day-to-day operations—but it’s baked into nearly every M&A deal.
I’ve worked with smart, successful business owners who were shocked when they found out they needed to “leave money behind” to cover the peg. It felt like a bait-and-switch—until we walked through the rationale.
2. It’s Not Always in the LOI
While some buyers include working capital expectations in the Letter of Intent, others don’t spell it out until the purchase agreement phase—well after exclusivity has begun.
This creates tension. Sellers think they’re negotiating a price. Buyers think they’re negotiating value plus working capital. Without alignment upfront, frustration builds.
3. There’s Room for Interpretation
What’s included in working capital? Should deferred revenue count? What about related-party payables?
Every business is different—and the definition of working capital in the purchase agreement matters. If it’s too vague, expect disputes.
4. You May Have “Managed” Working Capital Before the Sale
Some sellers try to boost cash before closing by:
• Slowing down payables
• Collecting receivables aggressively
• Cutting inventory levels
While that may help in the short term, it can hurt you if it results in working capital falling below the peg. Buyers will notice—and adjust accordingly.
Real-World Example: The Surprise $300,000 Adjustment
One of my clients—let’s call him Dave—owned a manufacturing business with $2.5M in annual EBITDA. He had a great buyer lined up and a purchase price of $12 million on the table.
What he didn’t fully anticipate was the working capital adjustment.
Based on historical averages, the buyer proposed a peg of $1 million. But in the two months leading up to the close, Dave’s team had slowed inventory purchases and collected on several large accounts receivable. Working capital at close came in at just $750,000.
The result? A $250,000 price adjustment, which came as a shock.
Fortunately, we had built strong trust with the buyer, and I was able to negotiate a $50,000 cap on the adjustment as a compromise. But it was a stressful lesson for the seller—and one I now work hard to help others avoid.
How to Avoid Working Capital Surprises
If you’re preparing to sell your business, here’s how you can stay ahead of this issue:
✅ 1. Understand Your Historical Working Capital
Work with your CPA or advisor to calculate your trailing 12-month working capital and identify seasonal trends or anomalies. Know your baseline—and how it moves over time.
✅ 2. Get the Peg Defined Early
Negotiate the working capital target during the LOI stage—not after. That way, you can avoid surprises and preserve leverage in the negotiation.
✅ 3. Define Working Capital Clearly in the Purchase Agreement
Spell out which accounts are included (and excluded), how inventory is valued, and how any unusual items will be treated. Clarity here reduces the chance of post-close disputes.
✅ 4. Maintain Normal Business Operations Before Closing
Don’t try to game the system. If you run leaner than usual before close, you could create a shortfall. Stay consistent with historical operations until after the deal is done.
✅ 5. Forecast Working Capital Leading Up to Close
Your advisor or CFO should be tracking working capital on a weekly basis as you approach closing. That way, if a shortfall is likely, you can address it in advance—not after the fact.
Bonus Tip: Escrow and Disputes
In many deals, part of the purchase price is held in escrow for post-closing adjustments—including working capital.
If the buyer believes working capital came in below the peg, they may file a claim against escrow. If you disagree, the dispute may go to a third-party accountant for resolution.
This process can be time-consuming and emotional. That’s why defining the adjustment formula and mechanics before closing is so important.
Final Thoughts: It’s Not Just Accounting—It’s Real Money
Working capital adjustments may seem like a technical detail, but they directly affect your bottom line.
I’ve seen sellers lose six figures simply because they didn’t understand how this works—or didn’t plan for it in time.
On the flip side, I’ve also helped sellers negotiate favorable pegs, limit adjustment exposure, and maximize their net proceeds—all by getting ahead of the conversation.
If you’re thinking about selling your business, this is just one of many areas where an experienced M&A advisor can make a big difference. We’re not just here to find buyers—we’re here to protect your interests, anticipate the pitfalls, and guide you through every detail.
Because when you’ve spent a lifetime building your business, you deserve to exit on your terms—and walk away with what you’ve earned.
Thinking about selling your business? Let’s talk.
Contact me today for a confidential conversation about your goals—and how to prepare your business for a smooth, successful, and surprise-free exit.
Blog: Why Working Capital Adjustments Catch Sellers Off Guard (And How to Prepare for Them)
Mark Hartmann is a former business owner turned M&A advisor who knows firsthand what it takes to build, grow, and sell a successful company. A three-time Inc. 5000 CEO, Mark did just that before navigating its eight-figure sale—giving him a rare perspective that sets him apart from most brokers. Today, he helps owners of companies valued between $1M and $25M plan and execute smooth, profitable exits.
Mark understands that selling a business isn’t just a financial decision—it’s personal. That’s why he works closely with owners to protect their legacy, maximize value, and make the transition on their terms. He holds an MBA from Eastern University, a Master’s Degree in Organizational Change Management from St. Elizabeth University, and a Graduate Certificate in Executive Coaching from Columbia University. Some of his professional credentials include Certified Mergers & Acquisitions Professional (CM&AP), Certified Business Intermediary (CBI), Certified Exit Planning Advisor (CEPA), and Certified Value Builder (CVB).
44 Washington Street, Unit #1080
Morristown, NJ 07960
Partner with HartmannRhodes, expert business brokers and M&A advisors, to navigate your business sale with precision—maximizing value and ensuring a smooth transition. Reach out for tailored business sale strategies. Contact us today!
