A working capital adjustment compares the working capital delivered with a business at completion against an agreed target. If the agreement provides for an adjustment, a difference can change the amount the seller receives.
The mechanism is a negotiated part of the price. The target, included balances and accounting rules need to be understood together. Some transactions use a different pricing mechanism, so an adjustment should not be assumed to apply to every sale.
Agree what counts.
The contract should define the assets and liabilities included in working capital. Accounting labels alone may not answer how a particular balance is treated in the transaction.
Check receivables, stock, trade payables, customer deposits, employee-related balances and any other material items. Agree their treatment with your accountant and lawyer. Consider how the working capital definition interacts with cash, debt and other price adjustments so an item is not counted twice.
Use a consistent basis for the target and completion.
Ask how the working capital target was calculated and whether the reference period reflects the business. Seasonality, unusual trading and changes in accounting treatment may need to be addressed.
The target and the completion calculation should be comparable. If they use different definitions or policies, the comparison may produce an adjustment the parties did not intend.
An illustration.
Suppose the target was calculated from management accounts that included old receivables. The agreement then excludes those receivables from the completion calculation. Even if the business otherwise trades as expected, comparing those two bases could distort the result.
That is a hypothetical example, not a reported client outcome. It shows why checking the target alone is not enough: the definitions and calculation need to line up.
Agree how the accounts will be settled.
The completion accounts provisions should address who prepares the figures, which information must be supplied, the review period and how disputed items are resolved. Check the role and authority of any independent accountant.
Ask your advisers to explain how the proposed wording would work using the business’s own records before the terms are finalised.
Put it into the sale plan.
Work through the price mechanism while the commercial terms are being negotiated. Identify who is responsible for the financial analysis and who will turn the agreed position into contract wording.
Our first-time seller checklist puts the adjustment in the wider transaction. If the proposed calculation or agreement needs attention, tell us about your sale.