Khaled Azar 
Working capital adjustments appear in more than 90% of private-target M&A transactions today, up from roughly 50% a decade ago (SRS Acquiom 2026 Study). They are the single most common reason a seller’s take-home check differs from the headline purchase price. If you are selling a business and you have not modeled your working capital position, you are almost certainly leaving money on the table or walking into a surprise at closing.
I watched it happen last year. A founder sold his $4.2 million services company, shook hands on the price, spent three months in due diligence, and then learned at closing that his net payout was $4.2 million minus a $185,000 working capital adjustment. He had never heard the term before the LOI was signed. That gap was completely avoidable.
What Working Capital Actually Means in a Deal
It is not the same number your accountant uses on your tax return.
Working capital in an M&A context is current assets minus current liabilities. But what counts as “current” gets negotiated. Buyers and sellers argue over which line items go into the calculation, and those arguments directly affect your payout.
The common components:
- Current assets — accounts receivable, inventory, prepaid expenses, deposits
- Current liabilities — accounts payable, accrued expenses, deferred revenue, payroll liabilities
Cash and debt are almost always excluded from the working capital calculation. They get handled separately in the purchase agreement. The working capital number represents the operational fuel your business needs to run day-to-day.
Buyers care about this because they are buying a functioning business. If the business cannot pay its vendors, collect its receivables, and fulfill its obligations from Day 1, the buyer has to write an extra check. They will not do that quietly.
Working capital is the operational funding your business needs to function. Buyers expect to receive it at closing, and they will adjust the price if the balance falls short.
How the Adjustment Mechanism Works
The math is simple. The negotiation is not.
Every deal with a working capital provision follows the same basic structure. Both sides agree on a “target” or “peg” during LOI or purchase agreement negotiations. That target is usually the trailing 12-month average of net working capital, though some deals use a shorter window or a normalized figure.
At closing, the actual working capital is measured. If it is above the target, the seller gets a bump. If below, the buyer takes a dollar-for-dollar reduction from the purchase price.
Here is a concrete example from a deal we advised on:
The seller agreed to a $5 million purchase price with a $300,000 working capital target. At closing, actual working capital was $130,000. The buyer deducted $170,000 from the wire.
The closing balance sheet looked like this:
| Line Item | Amount | Effect on Working Capital |
|---|---|---|
| Accounts Receivable | $200,000 | + (asset) |
| Prepaid Expenses | $50,000 | + (asset) |
| Deferred Revenue | ($100,000) | – (liability) |
| Accounts Payable | ($20,000) | – (liability) |
| Net Working Capital | $130,000 | $170K below target |
The seller’s reaction: “I thought we agreed on $5 million.” Technically, they did. But the purchase agreement said the price assumed $300,000 in working capital would be delivered. The business came in $170,000 light, so the check came in $170,000 light.
Working capital adjustments are dollar-for-dollar. Every dollar below the target comes directly out of your proceeds.
Why Sellers Get Blindsided
In our experience advising lower middle-market transactions, working capital surprises happen for three reasons.
First, sellers focus on the headline number. You spend months negotiating a $5 million or $8 million price. Working capital feels like an accounting detail. It is not. In deals we have closed, working capital adjustments have ranged from $50,000 to over $400,000. That is real money.
Second, working capital shifts between LOI and closing. Three to six months pass during due diligence. In that window, receivables get collected, payables stack up, and seasonal patterns move the balance. If you are not tracking your working capital monthly during this period, you are flying blind.
Third, deferred revenue is a killer. SaaS and subscription businesses often carry large deferred revenue balances. That deferred revenue is a liability in the working capital calculation. The buyer inherits the obligation to deliver the service, so they subtract it. Founders who run subscription businesses frequently underestimate how much this one line item costs them at closing.
How to Protect Your Payout
Every seller we work with at Livmo goes through working capital modeling before we go to market. Here is what that looks like in practice:
- Run a 12-month trailing average now — Calculate your net working capital for each of the last 12 months. That average is likely what the buyer’s QoE firm will propose as the target. Know your number before they do.
- Identify seasonal swings — If your business collects annual contracts in Q1, your working capital spikes and then declines. A 12-month average smooths this, but you need to understand when in the year you are above or below the line.
- Negotiate what is included — Not every line item has to be in the calculation. Some sellers successfully exclude deferred revenue or certain prepaid categories. This is where your due diligence preparation matters.
- Watch your balance sheet during diligence — Do not take excess distributions. Do not let payables balloon. Do not accelerate collections in a way that depletes post-closing receivables. Every action you take between LOI and closing affects the final calculation.
- Push for a collar or threshold — Some deals include a “collar” where small variances (say, plus or minus $25,000) do not trigger an adjustment. This protects both sides from nickel-and-dime disputes.
Working capital targets are negotiable. In our practice, we have seen sellers recover six figures by challenging the buyer’s proposed target with better data. A quality of earnings report (QoE) from your side can be the difference between accepting the buyer’s number and setting your own.
Model your working capital before going to market. The seller who knows their number controls the negotiation. The seller who discovers it at closing loses.
Frequently Asked Questions
Is cash included in the working capital calculation?
Almost never. In more than 90% of private M&A transactions, cash and funded debt are excluded from working capital and handled separately in the purchase agreement. The working capital calculation focuses on operational items like receivables, payables, and accrued expenses.
How is the working capital target determined?
The most common method is a trailing 12-month average of net working capital, adjusted for any one-time or non-recurring items. Buyers typically have their QoE firm calculate this number. Sellers benefit from running their own calculation first so they can challenge the buyer’s figure with data.
What happens if working capital is above the target at closing?
The seller receives a dollar-for-dollar increase to the purchase price. If the target is $300,000 and actual working capital at closing is $350,000, the seller gets an extra $50,000. This is why some sellers strategically build working capital ahead of closing.
Can working capital adjustments be disputed after closing?
Yes. Most purchase agreements include a 60-90 day post-closing period for the buyer to finalize the working capital calculation. The seller can dispute the buyer’s numbers during a defined review window. Unresolved disputes typically go to an independent accounting firm for final resolution.
Next Steps
Working capital adjustments do not have to be a surprise. We model the impact before you go to market so you know exactly what to expect at closing.