Tariff Volatility Is Reshaping Working Capital True-Ups

The cycle of tariff imposition, expansion, and partial reversal that began in 2025 has changed the way buyers and sellers approach working capital in M&A transactions. What used to be a relatively standardized true-up exercise has become one of the most negotiated mechanics in the deal, and the ripple effects extend deep into the quality-of-earnings analysis that supports the working capital peg. Sellers who have not updated their diligence preparation for this environment are surrendering value at the negotiating table.

Why Working Capital Adjustments Carry Outsized Weight

In a typical middle-market transaction, the working capital adjustment sets a baseline level of net current assets that the seller is required to deliver at closing. If the actual delivered working capital exceeds that baseline (the "peg"), the buyer pays the difference. If it falls short, the purchase price is reduced. The peg is meant to ensure that the buyer steps into a business with the operating runway it underwrote during diligence. In stable conditions, the calculation is mechanical. In a tariff-disrupted supply chain, almost every line in the working capital schedule moves.

The mechanic is purchase-price-relevant in a way that gets underestimated. A $5 million swing in delivered working capital is a dollar-for-dollar adjustment to the seller's net proceeds. For a transaction with a $50 million enterprise value, that is ten percent of the headline price moving on a single negotiation that is sometimes treated as routine.

What Tariffs Do to the Working Capital Schedule

Tariffs hit each component of working capital differently, and the timing patterns matter as much as the absolute exposure.

Inventory. When tariffs land on imported components or finished goods, the cost basis of inventory rises. If the seller capitalizes the tariff into inventory under standard cost accounting, the balance sheet swells without a corresponding economic change. Buyers often push to normalize the peg using a pre-tariff cost basis, arguing that the tariff is a non-recurring or pass-through cost. Sellers often push back, noting that the cost basis is real and is what the buyer will face if it has to replenish inventory. Where the parties land usually depends on whether the seller can demonstrate a credible pricing pass-through to customers.

Accounts receivable. Tariff disruption can stretch collection cycles when customers respond to higher invoice prices by extending payment terms or disputing line items. A trailing twelve-month average accounts receivable balance may understate the working capital the business now needs, particularly if collections have lengthened in the most recent quarter. Buyers sometimes try to use the older, lower number; sellers should be ready with a pattern analysis that explains the change.

Accounts payable. Sellers facing tariff cost pressure often lean on their own payable terms to manage cash. That can flatter delivered working capital at closing in a way that is not sustainable. Buyers will reverse it. A clean QoE will identify any payable stretch and adjust the peg accordingly.

Pre-buying ahead of tariff effective dates. Many businesses accelerated purchasing in 2025 to lock in inventory before scheduled tariff increases. The resulting bulge in inventory and corresponding payable run-up can distort the trailing-twelve-month working capital calculation. Sellers benefit from highlighting these one-time movements in advance; buyers will find them in diligence regardless.

How Quality-of-Earnings Work Has Adapted

The quality-of-earnings analysis (the diligence exercise that stress-tests reported earnings to separate sustainable profit from one-time items) has expanded in parallel. QoE providers in 2026 are spending more time on three areas that used to be lighter touch.

The first is tariff pass-through analysis. Customers may absorb a tariff increase, push it back, or split the impact. The pattern matters for both run-rate EBITDA and the working capital peg. A seller that can document customer-by-customer pass-through outcomes during the tariff cycle gives the buyer the evidence it needs to respect a higher peg.

The second is inventory aging and obsolescence. When tariffs push management to pre-buy or substitute suppliers, the resulting inventory profile may include slow-moving SKUs or alternative-source components that have not yet found their place in the production schedule. The diligence team will look at days of inventory on hand by category and may propose reserves that flow through to net working capital.

The third is supplier concentration risk in the cost of goods structure. If the target depends heavily on suppliers in a tariff-affected jurisdiction, the buyer will want a view on the cost trajectory under different policy scenarios. That analysis often identifies sourcing shifts already underway, with implications for both the income statement and the working capital build.

Negotiating the Peg in a Volatile Environment

Two structural choices are getting more attention this year. The first is the choice between a locked-box mechanism and a closing-accounts mechanism. In a locked box, the parties set the working capital and net debt position at a date in advance of signing, and the buyer assumes the economics from that date forward. In a closing-accounts deal, the working capital is measured at closing and trued up post-close. Tariff volatility has tilted preferences toward closing accounts because it gives the buyer recourse to a price adjustment if conditions move materially between signing and closing.

The second is the duration of the look-back period for the peg. Trailing twelve months is the convention, but in a year where the second half of the period bears significantly different tariff economics from the first half, a twelve-month average may not represent the working capital the business actually needs. Sellers may push for a peg based on the most recent six months or a normalized rolling average that excludes a defined transition period. Buyers may resist, pointing to seasonality. The negotiation is more nuanced than it has been in recent memory.

Practical Steps Before You Go to Market

A seller-side preparation process that takes tariff dynamics seriously will pay back several times over. The work should begin three to six months before launching a process, not in response to buyer questions during diligence.

What Buyers Are Doing Differently

Buyers are not standing still either. The diligence checklist now includes tariff scenario modeling against the company's specific bill of materials, supplier-by-supplier exposure schedules, and a forward view on customer concession risk. Where exposure is concentrated, buyers are increasingly insisting on tariff-related material adverse change provisions, separate purchase price adjustments tied to tariff developments between signing and closing, or escrows specific to working capital disputes. Earnouts and deferred consideration are also being deployed more aggressively to bridge the gap when the parties cannot agree on the steady-state working capital level.