How not to lose $340,000 in working capital six weeks after you thought you were done.

Small differences compound. This is true in investing, in habits, and in business sales.

The number on the front page of the term sheet gets attention because it’s the biggest number. The numbers behind it get less attention because they look smaller. But small numbers, working in the wrong direction, add up to large numbers by completion.

The working capital adjustment is the most important of these small numbers. On a sub-$20M Australian sale, it routinely costs unprepared sellers more than they expected. Sometimes much more.

Here’s why.

What it actually is.

The price on the front of the term sheet is not the last word on the price you receive. Between the term sheet and your bank account sits a mechanic called the working capital adjustment.

In plain terms: when the buyer takes ownership, they need a certain level of working capital (receivables, inventory, payables) to keep the business running. They resist funding this themselves on top of the purchase price. So the deal is structured so that you deliver the business with a “normal” amount of working capital at completion. Less than normal, the price comes down dollar for dollar. More than normal, in theory, the price goes up.

The mechanic is reasonable in a theoretical sense. The problem is that working capital gets treated as an accounting matter, when in fact it is a price negotiation in a clever disguise.

Where it goes wrong.

The standard buyer proposal in larger deals is a trailing twelve-month average of net working capital. On its face, fair. In practice, a trap for any small business with seasonality or any non-standard usage pattern.

Most businesses have seasonality, of course. Which is the thing nobody mentions when they propose the trailing-twelve-month average.

The other landmine is the definition of “debt.” The SPA defines what counts as debt for the cash-free, debt-free price calculation. Buyers routinely propose definitions that sweep in customer deposits, accrued employee entitlements, deferred revenue, related-party loans, unpaid tax instalments. Each item that lands in “debt” comes off the price at completion. Individually small. Together on a sub-$20M deal, $100,000 or more.

This is how small numbers compound.

What to do.

Five things, in roughly the order they matter.

  • Treat the working capital schedule as a price negotiation, not an accounting exercise. It’s part of the price. Engage your accountant and your lawyer on this before you sign anything.
  • Insist on a normalised seasonality adjustment. If your business has any seasonality at all, the calculation must remove it.
  • Read the definitions. “Current assets,” “current liabilities,” “cash,” “debt.” These are silent battlegrounds. Each line item swept into “debt” reduces the price at completion. Each item excluded from “current assets” reduces the working capital you’re credited with delivering. Insist on a line-by-line walk-through.
  • Model three scenarios: a strong quarter at close, a weak quarter, and a normal quarter. If the model produces meaningfully different outcomes, the methodology is wrong.
  • Negotiate the completion accounts process as carefully as the price. Who prepares the accounts. How long you have to review them. The dispute resolution mechanism. The role of an independent accountant.

Why this matters more on smaller deals.

On a $100M deal, a working capital adjustment is meaningful but rarely life-changing. It’s contested by sophisticated advisors on both sides (for fees).

On a sub-$20M deal, the buyer is often more sophisticated than the seller, and a $300,000 adjustment is a much larger percentage of the headline. The asymmetry is what makes sub-$20M sellers particularly exposed.

But the decision whether a working capital adjustment is appropriate is the second-most important number in the deal. On a smaller deal, it’s punching above its weight.

The afternoon you sign the SPA is not the afternoon to learn this. The afternoon to learn this is now. Today. While you are reading this, possibly drinking a cuppa, feeling, perhaps, a little overwhelmed.