Net Working Capital: The Closing Adjustment That Surprises Sellers

Most owners selling a business focus on the headline number: the purchase price written into the letter of intent. Far fewer understand that the amount they actually receive can shift by a meaningful sum weeks after closing, through a mechanism called the net working capital adjustment. It now appears in more than 90 percent of private-target deals, according to SRS Acquiom's 2026 study of more than 1,500 transactions worth over $385 billion, up from roughly half a decade ago. For a seller who has not been through it, the post-closing true-up can feel like a second negotiation after the deal was supposed to be done.

What the Adjustment Is Trying to Protect

Net working capital is the operating cash a business needs to function day to day: current assets such as accounts receivable and inventory, minus current liabilities such as accounts payable and accrued expenses. It excludes cash and debt, which are handled separately in most deals. A buyer expects to take over a company with a normal level of working capital already in place, enough to collect from customers, pay suppliers, and keep inventory on the shelves without having to inject cash the morning after closing.

The adjustment exists to hold both sides to that expectation. If the seller drains receivables or lets payables pile up in the weeks before closing, the buyer inherits a business that is short on operating cash and has effectively been paid for value that is no longer there. The working capital adjustment corrects for that by comparing the working capital delivered at closing against an agreed benchmark, then moving the price up or down to match.

How the True-Up Actually Works

The process runs in two steps, and the gap between them is where sellers get caught. First, the parties set a benchmark, often called the peg or the target, usually based on the average working capital the business carried over the prior 12 months. At closing, the seller provides an estimate of working capital as of the closing date, and the price is adjusted preliminarily against the peg: deliver more than the target and the price rises, deliver less and it falls.

The second step happens after closing. Within a defined window, commonly 60 to 90 days, the buyer prepares a final calculation of the closing-date working capital and compares it to the seller's estimate. If the final number comes in lower than what the seller estimated, the seller owes the difference back. Many deals hold a portion of the proceeds in a separate working capital escrow, typically around 1 percent of the transaction value, precisely to cover this true-up. The seller does not see that money until the calculation is settled.

Why First-Time Sellers Get Surprised

The surprise rarely comes from bad faith. It comes from how the benchmark is set and how working capital is measured. Setting the peg is itself a negotiation, and a buyer who proposes a target above the company's true normal level is quietly lowering the price, because the seller must then deliver more working capital to avoid a reduction. Owners who treat the peg as a technical afterthought often give up real value before the first calculation is ever run.

Measurement is the other trap. The agreement has to define which accounts count and on what accounting basis. Seasonal businesses swing widely through the year, so a target built on the wrong months can misstate what normal looks like. Reserves, accrued liabilities, and revenue cutoffs all involve judgment, and a buyer reviewing the closing balance sheet has every incentive to take a conservative view that pushes the final number down.

Where the Disputes Come From

Post-closing working capital is among the most common sources of disputes in private M&A, and the causes are consistent. Ambiguity in the definitions is the leading one. When the purchase agreement does not spell out exactly how each account is calculated, the buyer and seller can apply the same words and reach very different numbers. Weak or skipped normalization is close behind: if the parties never agreed on how to smooth one-time items and seasonal swings, the true-up becomes an argument rather than an arithmetic exercise.

Most agreements anticipate this. They give the seller a window, often 30 to 45 days, to review the buyer's calculation and object, and they route anything still unresolved to an independent accountant whose decision binds both sides. That referee process works, but it is slow and expensive, and it tends to favor whichever side wrote clearer definitions into the agreement. SRS Acquiom, whose in-house accountants have resolved more than 2,900 of these adjustments, frames the lesson plainly: these disputes are won or lost in the drafting, long before the numbers are run.

Why It Matters More in a Selective Market

The working capital adjustment is not new, but it carries more weight in the current deal environment. Buyers in 2026 are fewer and more selective, and the diligence they run is more rigorous than it was even two years ago. That scrutiny extends to the closing balance sheet, where a careful buyer will test every reserve and every cutoff. In a market where the gap between prepared and unprepared sellers keeps widening, the owner who has modeled working capital, tightened the definitions, and run a sell-side review holds the stronger position when the true-up arrives.