How Working Capital Adjustments Affect Your Sale Price

A founder-friendly guide to one of the most misunderstood mechanisms in M&A

When selling your business, you might assume the sale price is fixed once agreed. But in most deals, working capital adjustments are used to fine-tune the final amount paid and if you don’t understand how they work, you could lose significant value without realising it.

In this blog, we break down what working capital adjustments are, how they’re calculated, and where sellers often get caught out.

What is a working capital adjustment?

In simple terms, it’s a way for the buyer to ensure the business is handed over with enough “fuel in the tank” to run smoothly from day one.

Working capital includes:

• Debtors (accounts receivable)

• Stock/inventory

• Creditors (accounts payable)

The buyer wants to avoid injecting cash into the business immediately after completion, so they expect a “normal level” of working capital to be delivered with the business.

If the actual working capital at completion is less than the target, the purchase price is reduced. If it's more than the target, the seller may receive an additional payment.

How is the adjustment calculated?

1. A target working capital level is agreed, usually based on an average of recent months

2. On completion, actual working capital is measured from the final balance sheet

3. The difference (positive or negative) is added to or deducted from the purchase price

This is often handled as part of a completion accounts mechanism.

 Common traps for sellers

1. Poorly negotiated targets

If the target is too high, you're on the hook for a large top-up. If it's not clearly defined, you're open to dispute.

2. Seasonality ignored

If your business is seasonal, using an average target may misrepresent what’s “normal” at completion.

3. Cash-like or debt-like reclassifications

Buyers sometimes argue that certain balances shouldn’t count as working capital, this can lower the adjusted price.

4. No cap or collar

If there's no floor/ceiling on the adjustment, you have unlimited downside exposure, particularly risky in volatile businesses.

What you can do to protect value

• Request a clear working capital definition in the Heads of Terms

• Push for a sensible averaging period - 12 months is typical, but context matters

• Understand what’s being included and excluded (e.g. accrued expenses, tax balances)

• Consider a collar (±£X tolerance band) to reduce disputes over small variances

How Deal Clarity can help

Working capital adjustments are rarely understood fully by sellers and often not explained properly until after Heads are signed.

We provide:

• Fixed-fee review of Heads of Terms or SPA language

• Working capital modelling and target benchmarking

• Advice on how to position this in negotiations