How Net Working Capital Adjustments Work in a Deal

Introduction: Small Numbers, Big Impact

You’ve agreed on a purchase price. But at closing, the buyer says your final payout will be $700,000 less due to a “net working capital shortfall.”

Welcome to the world of net working capital (NWC) adjustments—one of the most misunderstood, and most impactful, financial mechanisms in M&A.

At William & Wall, we help business owners anticipate these adjustments, negotiate fair benchmarks, and avoid post-close surprises. Here's how it works.

1. What Is Net Working Capital?

At its core, net working capital is:

Current Assets – Current Liabilities
(e.g., accounts receivable + inventory – accounts payable)

Buyers use it as a proxy for the operating liquidity required to run your business day-to-day.

2. Why Does NWC Matter in a Sale?

Buyers expect the business to be delivered with a “normal” level of working capital—enough to maintain operations without injecting additional cash immediately after closing.

If your NWC at closing is below this benchmark, the buyer will reduce the purchase price. If it’s above, you may receive a purchase price increase.

📉 Example:
If the target NWC is $5.0M and actual NWC at close is $4.6M, the buyer may deduct $400K from the purchase price.

🧠 This is not just a finance detail—it’s real money off the table.

3. How the Target NWC Is Set

This is where negotiations matter. The target is typically based on a historical average—commonly the trailing 12-month average NWC, adjusted for seasonality.

🧠 Best Practice:
Use a 12- or 24-month rolling average that excludes outliers and reflects normalized business operations.

📍Our team at William & Wall routinely negotiates these baselines with precision to ensure sellers aren’t surprised at closing.

4. The Diligence Trap: Buyer Adjustments

Buyers often make post-LOI “adjustments” to how they calculate NWC—excluding certain receivables, reclassifying prepaid expenses, or inflating accrued liabilities.

🛡️ Seller Defense Strategy:

• Agree upfront on the NWC definition in the LOI or purchase agreement.

• Lock in the treatment of key items like intercompany accounts, owner-related liabilities, and deferred revenue.

• Use your own quality of earnings provider to ensure an objective analysis.

5. Post-Close True-Up Period

Most deals include a true-up window (30–90 days post-close) during which the buyer finalizes actual NWC.

If there’s a shortfall vs. target, they deduct it from your escrow or seek repayment. If there’s a surplus, you receive a bonus (though less common in practice).

⚖️ What You Need:

• A competent M&A CPA

• Pre-close estimates based on clean monthly financials

• Legal language that protects your downside

6. Why Sellers Often Lose Value Here

Without professional guidance, sellers:

• Misunderstand how NWC is calculated

• Assume cash will be included (it often isn’t)

• Fail to normalize for seasonality or one-time items

• Don’t verify the buyer’s final NWC calculation post-close

📉 These missteps can cost hundreds of thousands—or even millions—in last-minute price adjustments.

Conclusion: This Isn’t Just Accounting—It’s Deal Value

Net working capital isn’t a line-item formality. It’s a price adjustment mechanism that sophisticated buyers use to their advantage. But with the right preparation, you can avoid surprises and protect your proceeds.

📍At William & Wall, based in Scottsdale and serving clients nationwide, we protect deal value through detailed working capital analysis and disciplined negotiation support.

Selling a Business? Let’s Make Sure the Final Price is the Actual Price.

If you're considering a sale, talk to William & Wall early. We’ll help you understand, negotiate, and defend working capital provisions—before they impact your closing statement.