The Price That Moves After Closing: What the Net Working Capital Adjustment Really Does

The figure in the letter of intent is almost never the amount that lands in the seller's account, and in most of the mandates I run, the buyer isn't the one to blame for that. It's a clause few people read closely before signing, the one that recalculates the final price against the net working capital measured on the day the business actually changes hands.

Once you see the mechanism, it's straightforward. Buyer and seller agree on a target level of net working capital, the gap between current assets, inventory, receivables, and short term liabilities, payables, accrued expenses, that needs to stay in the business for it to keep running normally after the deal. If the real figure at closing comes in above that target, the seller gets a top up. If it comes in below, the seller pays the difference back. On paper the clause protects both sides equally. In practice, it's almost always the seller who discovers the gap after the fact, and rarely in their favour.

The first surprise sits in how the target itself gets set. It's usually pegged to a twelve month average, sometimes to a specific season if the business is cyclical. A seller who managed cash carefully through the negotiation year, tightening inventory or collecting receivables faster to present clean numbers to the buyer, often ends up below their own average at closing, and owing money on a clause that was meant to protect them.

The second surprise sits in the definitions. What counts as net working capital is never as obvious as it looks on first read: do customer prepayments count as a liability or as deferred revenue, does an accrual for unused holiday belong in the calculation or sit outside it, does obsolete stock get valued at cost or at expected resale value. Each of these definitions, negotiated line by line in the technical schedule of the agreement, can move the final figure by tens of thousands of francs on a mid sized business. It's work for an accountant or a financial adviser, not a clause to skim past on the way to the more visible ones, price and non compete.

What I recommend, every time, is having the target calculated by someone who has gone through the company's numbers far enough in advance to know the real cash cycles, not just the averages on the reports. A seller who first meets the contract's definitions on the day the buyer presents the closing calculation has no room left to negotiate: the text is already signed, and all that's left is disputing figures, a slow exercise that rarely favours the side who prepared less.

What this mechanism actually changes is the moment the seller can freely dispose of the proceeds. An owner who has already earmarked the negotiated price for something personal, paying off a private loan, funding a new venture, in the weeks after closing sometimes finds that part of that sum stays tied up until the completion accounts are agreed, or worse, that they owe back money already committed elsewhere. Building that uncertainty into your own financial timeline, not just the deal's timeline, avoids a stress you don't see coming right when you thought the negotiating was over.

Net working capital isn't a schedule to leave with the lawyers. It's often the last number that actually moves the amount landing in the seller's account.

The final calculation almost always happens after closing, on completion accounts drawn up in the thirty to sixty days that follow. Many sellers relax at that point, assuming the deal is done once signatures are on the page, when it's exactly this window where the last adjustment gets settled. I've seen deals reopened over a disagreement on those completion accounts, resolved through an independent expert appointed under a procedure written into the contract, not unlike the mechanism that sometimes governs an escrow arrangement for other kinds of guarantees.

What separates the deals that go smoothly isn't the outcome of the calculation so much as how well it was anticipated. A seller who knows their target, who has had the contract's definitions translated into real numbers against their own books, walks into closing with a rough sense of what to expect. The one who discovers the mechanism after signing usually learns, a few weeks later, that an amount they thought was theirs wasn't quite settled yet.