What Is a Working Capital Adjustment and Why Does It Matter in a Business Sale?

What Is a Working Capital Adjustment and Why Does It Matter in a Business Sale?

In a business sale, understanding the working capital adjustment is essential. It directly affects the final price and can shape the success of the deal.

This is one of the most misunderstood elements in a transaction. Yet it can easily affect the final price by tens or even hundreds of thousands of pounds. If you are preparing to sell, understanding how this mechanism works is essential.

What Is a Working Capital Adjustment?

A working capital adjustment is a pricing mechanism that ensures the buyer receives a business with a “normal” level of working capital, enough to continue trading smoothly from day one, without needing to inject extra cash.

Working capital typically includes:

• Current assets such as debtors and stock

• Minus current liabilities such as creditors and accruals

At a high level, it reflects the short-term liquidity of the business. Too little working capital can leave the buyer short on cash to pay suppliers or fulfil orders. Too much, and the seller may be giving away more than necessary.

How Does the Adjustment Work?

Before completion, both parties agree on a target working capital level, usually based on an average of recent months. After the deal completes, the actual working capital on the completion date is compared to this target.

• If the business delivers less than the target, the purchase price is reduced.

• If the business delivers more, the price increases (although buyers sometimes push back on this).

It is typically part of the completion accounts process and is finalised a few weeks after completion, once the balance sheet has been prepared and reviewed.

Why It Matters to Sellers

This adjustment can materially affect the net proceeds received. Sellers often focus on the headline number, only to be surprised when a downward adjustment is made weeks after the deal has closed.

Key risks include:

• Target set too high: You may be asked to leave more value in the business than necessary.

• Definition disputes: Unclear treatment of specific items, such as deferred income, director balances, or tax accruals.

• Seasonality distortions: If the business is seasonal, the reference period may not reflect a true average.

Without proper advice, sellers can unknowingly agree to terms that favour the buyer or allow them to chip the price post-completion.

What Should Be Agreed Up Front

The Heads of Terms should confirm:

• That the deal is subject to a working capital adjustment

• How the target will be calculated (e.g. trailing 12-month average)

• The components to be included or excluded

• That accounting policies will be consistent with past practice

Early alignment avoids confusion and helps both sides plan for how much cash will actually change hands.

Final Thought

The working capital adjustment is often one of the last things sellers consider — and one of the most important to get right.

It is not just a technical issue for accountants. It is a commercial point that directly affects your sale price. The good news is that with clear definitions, reasonable targets, and proper support, it is also a manageable one.

Want to understand how a working capital adjustment could impact your deal? Get in touch for a fixed-fee review or early-stage advice.