Working Capital Adjustment

A working capital adjustment — also called an NWC true-up or completion accounts adjustment — is the mechanism in an M&A transaction that reconciles the net working capital actually delivered at closing against the target amount agreed in the share purchase agreement. If the seller delivers more working capital than the target, the buyer pays an upward price adjustment. If less, the seller makes a downward payment. The true-up occurs after closing, typically within 60–90 days.

For M&A advisors, the working capital adjustment is one of the most consequential — and most frequently disputed — mechanics in the sell-side process. Advisors who allow a vague NWC definition at the LOI stage routinely spend weeks relitigating it in SPA drafting and again in the post-close true-up process.

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Why Working Capital Adjustments Exist

The working capital adjustment exists because the timing of signing and closing creates an economic gap between the business the buyer agreed to acquire and the business it actually receives.

A business generates working capital — accounts receivable, inventory, prepayments — and consumes it through accounts payable, accrued liabilities, and deferred revenue. This balance fluctuates daily. Without an adjustment mechanism, a seller could extract cash from the business in the period between signing and closing (by accelerating collections, deferring supplier payments, or running down inventory), leaving the buyer with a depleted working capital base at close.

The working capital adjustment ensures the buyer receives the balance sheet the SPA contemplated.

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How the NWC Target Is Set

The working capital target — often called the NWC peg — is the agreed net working capital level that the seller must deliver at closing. Setting the peg is a negotiation, but the standard approach is to base it on a trailing average of the business’s historical working capital:

• LTM average — the average monthly NWC over the last twelve months, which normalises seasonal fluctuations
• Point-in-time balance — the NWC at a specific historical date (the locked-box date in locked-box structures, or a reference date in completion accounts transactions)
• Negotiated peg — where the business has unusual working capital characteristics (rapid growth, seasonal peaks, project-based revenue), the parties negotiate a target that reflects a “normalised” level

Once the peg is set, the true-up formula is straightforward: closing NWC minus peg NWC equals the adjustment amount. Positive variance means the seller delivered more than the peg — buyer pays the difference. Negative variance means the seller came in short — seller pays the difference.

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What Is Included in Net Working Capital

The definition of net working capital — which current assets and liabilities are included — is where most disputes originate. There is no universal standard. The SPA must specify precisely which line items are in and out.

Typically included in NWC:

• Trade accounts receivable (net of doubtful debt reserves)
• Inventories (finished goods, WIP, raw materials)
• Prepaid expenses related to ongoing operations
• Trade accounts payable
• Accrued liabilities (wages, benefits, operating expenses)
• Deferred revenue (if operationally related)

Typically excluded from NWC:

• Cash and cash equivalents (handled separately in the enterprise-to-equity value bridge)
• Financial debt and interest-bearing obligations (handled separately)
• Current portions of long-term debt
• Tax liabilities and deferred tax assets (often treated separately)
• Capital expenditure payables not related to ordinary operations

The more precisely the NWC definition is drafted, the less room for post-close dispute. Advisors should push for a detailed NWC schedule — listing individual balance sheet line items with explicit inclusion or exclusion — rather than a high-level definition that references “current assets minus current liabilities.”

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Working Capital in the Enterprise Value Bridge

Working capital is also relevant to the enterprise value to equity value bridge in a pitchbook or CIM. Enterprise value is the value of the whole business on a debt-free, cash-free basis. To derive the equity value actually received by shareholders, advisors adjust EV for:

• Net debt — financial debt minus cash (bridge from EV to equity value)
• Working capital adjustment — delivered NWC versus target NWC (if below target, the equity value is reduced)
• Capital expenditure adjustments — for maintenance capex deferrals that leave the buyer with a below-standard asset base

In pitchbook valuation sections, advisors typically show the implied equity value to the seller by deducting estimated net debt and any anticipated working capital shortfall from the headline EV.

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Locked-Box Structures: No True-Up Required

In a locked-box structure, the working capital adjustment does not apply. The purchase price is fixed as of the locked-box date, and the seller receives a daily coupon or permitted leakage allowance through closing. Since the economic ownership transfers at the locked-box date, there is no post-close true-up for working capital.

Locked-box structures are popular precisely because they eliminate the post-close NWC dispute. The tradeoff is that the buyer bears the economic risk of any undisclosed leakage from the locked-box date to closing — which is why due diligence on pre-close cash movements is important in locked-box transactions.

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Common Disputes

Working capital true-ups generate disputes when:

• Definition is imprecise — the SPA fails to specify which line items are in or out; each party applies its own interpretation
• Accounting policy differences — the seller’s historical accounting policies and the buyer’s interpretation of GAAP or IFRS treatment diverge
• Seasonal distortions — the peg is set at a seasonal high or low, and closing at the opposite seasonal point creates a mechanical adjustment that doesn’t reflect business performance
• Deferred revenue treatment — SaaS and subscription businesses generate significant deferred revenue; whether this is included in NWC affects the peg significantly
• Non-recurring items — pre-close accruals for bonuses, legal settlements, or restructuring charges that the seller considers one-time but the buyer treats as operating

Advisors should work through the NWC definition in a trial balance exercise — applying the agreed formula to a recent set of accounts — before signing. If the formula produces counterintuitive results on historical data, it will produce disputed results on the closing balance sheet.

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Related Terms

• Equity Value — the seller’s proceeds after the enterprise value to equity bridge
• Enterprise Value — the valuation basis from which the equity bridge runs
• Letter of Intent (LOI) — the document where NWC peg and mechanism are first agreed
• Exclusivity — the period during which SPA NWC mechanics are finalised

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