How do working capital adjustments work at closing?

How do working capital adjustments affect your final sale price?

For a CEO selling a private company, working capital adjustments directly shape the final price by ensuring the buyer inherits an appropriate level of operational liquidity. The key concepts are the cash-free, debt-free (CFDF) structure and adjustments for deferred revenue and past-due accounts.

What are working capital adjustments? They align working capital at closing with a pre-agreed target so the buyer can operate without an unexpected cash injection. Working capital is current assets (cash, accounts receivable, inventory) minus current liabilities (accounts payable, accrued expenses, short-term debt).

The CFDF structure — the price is set without cash reserves or debts. Determine enterprise value (EV), then adjust: Purchase Price = EV + Cash − Debt. On a $6M EV with $1M cash and $0.5M debt, the seller receives $6.5M; reverse the cash and debt and it becomes $5.5M. Defining "cash" and "debt" is the tricky part — for example, outstanding cheques may reduce the cash balance or be treated as debt-like, lowering proceeds. This matters because capital gains are usually taxed more favourably than dividends, so clear documentation protects the seller.

Deferred revenue — this unearned revenue is a liability; if the actual amount ($300,000) exceeds the historical target ($250,000), EV is reduced by the $50,000 excess. If unaddressed and GAAP applies at close, all $300,000 could be treated as debt.

Past-due accounts — overdue receivables carry collection risk; if the actual amount ($100,000) exceeds the acceptable level ($60,000), EV is reduced by the $40,000 difference; if unaddressed, sellers will want all past-due amounts deducted from working capital.

Best practices — set clear targets reflecting history and seasonality, document all financial metrics, define the calculation and terms in the purchase agreement, and agree a dispute-resolution process such as third-party arbitration.

Key facts: working capital adjustments at close

Adjustments align closing working capital to a pre-set target
CFDF: Purchase Price = EV + Cash − Debt; defining cash and debt (e.g., outstanding cheques) is critical
Deferred revenue and past-due accounts above target reduce EV; unaddressed, they can be treated as debt
Best practice: clear targets, documentation, a defined calculation and a dispute-resolution mechanism

Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.