Adjusted Net Working Capital: What Buyers Need to Know at Closing

A working capital adjustment decides how much of the purchase price the seller keeps once someone closes the books on the month of the sale. Above $100 million the mechanism is near universal and heavily lawyered. Under $10 million it is often left out of the agreement entirely, or written in a single sentence nobody tested. Either way it can move six figures on a $4 million deal, and the language that decides it is usually drafted before anyone has looked at a monthly balance sheet.

The 2026 SRS Acquiom study found a purchase price adjustment in 91 percent of the private-target acquisitions it reviewed, with working capital the metric in 84 percent. Its deal set is 1,570 transactions worth more than $385 billion, averaging roughly $245 million each and bought mostly by private equity firms and public companies, so those figures describe mid-market convention. They matter at the small end anyway, because small-deal agreements borrow that market's language without borrowing the diligence behind it.

What the adjustment does

The purchase agreement typically names a target level of net working capital, usually called the peg. At closing the parties estimate what the business holds and move the price against that target: deliver $100,000 below the peg and the price falls by $100,000, deliver above it and the seller is owed the difference. Because the closing estimate is provisional, the agreement sets a date months later when the real figure gets calculated and the gap settled in cash.

The reasoning is that the buyer is paying for a business that can operate on the first morning, with enough receivables and inventory to fund the next cycle of payroll and purchasing. A seller who collects receivables hard and stretches payables through the final weeks hands over a thinner balance sheet, and the adjustment prices that back.

Most agreements settle the gap dollar for dollar from the first dollar. A minority build in a cushion: a collar, a deadband, or a de minimis threshold around the peg, so that small variances produce no payment at all. Where a cushion exists, the drafting decides what happens when it breaks. A deductible structure adjusts only the amount falling outside the band. A threshold structure opens up the entire difference from the peg once the band is crossed. On a $10 million peg with a $250,000 band and closing working capital of $9.6 million, the deductible version costs the seller $150,000 and the threshold version $400,000 on identical facts.

Cushions are rarer than buyers assume. In the SRS Acquiom data for the first three quarters of 2025, 11 percent of agreements conditioned the adjustment on a threshold being exceeded. The rest adjust from the first dollar.

How the target gets set

The usual starting point is a trailing twelve-month average of monthly net working capital, computed cash-free and debt-free, then normalized. Diligence providers strip out balances that do not belong to the operating cycle: a receivable from the owner's other company, inventory that has not moved in two years, an accrual booked once to true up a reserve. The same monthly trial balance that produces normalized EBITDA produces the working capital figure, so the two analyses travel together. Our guide to EBITDA add-backs covers the earnings half of that work.

Buyers argue for a higher peg and sellers for a lower one, and both can have an honest case. A business that grew 40 percent last year needs more working capital today than its twelve-month average carried, which supports a shorter lookback of six months or three. A flat year supports no such argument, and a seller who concedes a short lookback in a growth year is conceding real dollars.

What comes out of the calculation

Cash and interest-bearing debt come out. Acquisitions are typically priced on a cash-free and debt-free basis, so the seller keeps the cash and retires the loans at closing. What remains is ordinarily receivables, inventory, and prepaid expenses against payables and accrued operating liabilities.

The harder question is the accounts that sit among current liabilities without behaving like trade payables. Deferred revenue, customer deposits, accrued vacation, and unremitted sales tax all represent cash the business already collected or withheld against an obligation it has not discharged. A buyer will argue that each is debt-like and belongs in the debt column of the price bridge, where it reduces proceeds directly. A seller will argue they have always been part of the operating cycle and belong inside working capital, where the historical average that set the peg already reflects them.

Neither position wins automatically, and the answer turns on the particular account. Deferred revenue matched by a receivable on the same contract usually stays inside working capital. Deferred revenue representing cash collected for work not yet performed has the strongest claim to debt-like treatment, because the buyer will do the work without receiving the cash. What matters more than the label is that each account is named once and lands in one place. An item counted inside working capital and again in the debt column reduces the price twice, and that is easier to do than to unwind after closing.

The agreement should also require the closing statement to use the same accounting policies, methods, and estimation techniques that set the peg. Without that language a buyer can tighten a bad debt reserve or write down slow inventory after taking over, then collect the difference from the seller. Alvarez & Marsal reports that most of the issues and most of the dollars in a working capital dispute are decided by the wording of the purchase agreement rather than by the underlying accounting.

Seasonality

An annual average produces a number the business actually holds in only a few months of the year. Consider a distributor that builds inventory through the winter for a spring selling season, carrying $4 million of working capital in March and $1.5 million by October. Closing in October against a $2.8 million average peg costs that seller $1.3 million on a balance sheet doing exactly what it does every year.

RSM's transaction advisory group recommends matching the peg to the month or quarter in which closing is expected, or setting a schedule of monthly targets that moves with the cycle. Both fixes depend on having monthly data. A peg built from annual financial statements cannot see the swing it is averaging away.

Small acquisitions and SBA loans

Small acquisitions often leave the adjustment out altogether. In an asset sale the seller frequently keeps the receivables and settles the payables, and the buyer takes the business with inventory and equipment and funds the first operating cycle out of pocket. No peg, no closing statement, no true-up. The structure is simple to document and it can leave a buyer short of cash in the first sixty days, which makes it a purchase price question even when the agreement never uses the words working capital.

SBA financing adds a constraint. A 7(a) loan is sized to the purchase price the lender underwrote, so a peg that adjusts the price upward at closing has no obvious funding source. Working capital is an eligible use of 7(a) proceeds, so the usual answer is a working capital component alongside the acquisition tranche. SOP 50 10 8.1, effective October 1, 2026, narrows that route: where the lender reduces or waives the equity injection, permanent working capital cannot go into that loan or any other 7(a) term loan for 90 days, and has to come from the buyer's own cash or a line of credit. Keeping working capital inside the term loan means putting in the full equity injection.

Two further points come from the same manual. A working capital true-up owed under the purchase agreement may stay with the borrower for operating needs rather than paying down acquisition debt, while a performance-based rebate to the buyer gets the opposite treatment and has to reduce principal. The permitted sources of equity injection are also an enumerated list, and working capital the seller leaves in the business does not appear on it. Our post on the SBA's $3 million QoE requirement covers the rest of what changed on October 1.

The true-up timetable

The buyer prepares the closing statement after the fact, usually within 90 to 120 days according to Lincoln International. The seller then gets a review window, commonly 30 to 60 days, to deliver an objection notice naming the line items and amounts in dispute. Anything left unchallenged becomes final. A good faith negotiation period of roughly 30 days follows.

Most of it ends there. In the SRS Acquiom set, 57 percent of deals produced a buyer-favorable claim and 22 percent of those were contested, with a median resolution of about three weeks across all claims and six weeks for contested ones. The neutral accountant is a backstop rather than the normal path. Their authority covers accounting questions and stops short of interpreting the contract, and most agreements require them to pick a value for each disputed item inside the range the two sides proposed, which caps the cost of a bad outcome. Business Law Today's advice is to name the firm in the agreement while there is nothing yet to argue about.

What to settle before signing

The working capital definition, the peg, and the closing statement mechanics belong in the letter of intent or the first draft of the purchase agreement, while the price is still open. By signing, a buyer should know which accounts the definition covers, which liabilities sit outside it as debt-like, what accounting policies govern the closing statement, how any cushion behaves when breached, and whether the peg moves with the closing month.

A buyer holding a normalized monthly working capital schedule during diligence can propose a peg with support behind it and explain why a particular accrual belongs in the debt column. A buyer who waits for the closing statement is answering someone else's arithmetic with no data of their own, three months after the money moved.