Deal structure
A working capital adjustment changes the final price if the company's short-term assets and liabilities at closing differ from an agreed target level.
Working capital is the money tied up in day-to-day operations: receivables and inventory, less payables and similar short-term bills. A working capital adjustment compares the amount at closing to an agreed target.
For example, the target is $3 million. At closing, the company has $2.7 million. The price drops by $300,000. If it has $3.2 million, the price may rise by $200,000.
This matters because the buyer wants the business delivered with enough working capital to operate. A badly set target can cost you real money. Check how the target is calculated and what counts. A seller also should watch that collecting cash early or stretching bills does not distort the number.
Work with your accountant and lawyer before you agree. Terms like this appear in the letter of intent. Learn more in the letter of intent guide. Related: enterprise value.
Related terms
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