Handling Working Capital Adjustments Fairly
Working capital adjustments are one of the most common—and most emotionally charged—sources of friction in M&A deals. They show up late, feel technical, and often arrive at the exact moment when everyone is tired and eager to close. That combination makes them dangerous.
I’ve seen deals that looked clean on price unravel over relatively small working capital disputes. I’ve seen founders feel blindsided by post-LOI adjustments they didn’t fully understand. And I’ve seen buyers walk away convinced sellers were being unreasonable—when in reality, both sides were talking past each other.
In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I make the point that many deal conflicts aren’t about money—they’re about expectations. Working capital adjustments sit squarely in that category. And if you’ve listened to the Legacy Advisors Podcast, you’ve heard Ed and me return to this theme repeatedly: working capital is not about squeezing value—it’s about ensuring the business transfers in a normal, operable state.
Understanding that framing is the key to handling these adjustments fairly, without damaging trust or outcomes.
What Working Capital Adjustments Are Actually Meant to Do
At a high level, a working capital adjustment is designed to ensure that the business being sold has a “normal” level of operating liquidity at closing.
Buyers don’t want to acquire a business that:
- Can’t pay vendors
- Has stripped receivables
- Has bloated payables
- Lacks inventory to operate
- Requires an immediate cash injection
Sellers, on the other hand, don’t want to leave excess cash in the business that effectively lowers their purchase price.
The adjustment exists to bridge that gap—not to reprice the deal.
Why Buyers Care So Much About Working Capital
From a buyer’s perspective, working capital is operational oxygen.
Buyers expect:
- The business can run normally on Day One
- No artificial manipulation pre-close
- No immediate funding surprises
- Continuity of operations
Working capital adjustments protect buyers from inheriting a shortfall that wasn’t reflected in the headline price.
This isn’t about mistrust—it’s about practicality.
On the Legacy Advisors Podcast, we often say buyers aren’t buying a balance sheet—they’re buying a functioning business. Working capital is what keeps that business functioning.
Why Founders Often Feel Blindsided
Founders frequently underestimate working capital adjustments because:
- They focus on EBITDA and valuation
- They assume cash stays with the seller
- They view it as an accounting technicality
- They expect it to be “small”
But working capital is highly business-specific. Seasonal swings, growth, billing cycles, and vendor terms all influence what’s considered “normal.”
When expectations aren’t aligned early, surprises are almost inevitable.
In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I stress that founders should treat working capital as part of price—not a footnote to it.
The Concept of “Normalized” Working Capital
The heart of most disputes lies in one phrase: normalized working capital.
Normalized working capital represents the amount required to operate the business in the ordinary course—neither starved nor bloated.
The challenge is that “normal” isn’t universal. It depends on:
- Historical averages
- Seasonality
- Growth trajectory
- Billing and collection patterns
- Inventory cycles
- Vendor payment terms
Buyers and sellers often arrive with different interpretations of what “normal” looks like.
Where Working Capital Disputes Usually Arise
Most disputes fall into a few predictable categories.
Timing and Seasonality
If a business is sold at a seasonal low or high point, simple averages may misrepresent true operating needs.
Growth Effects
Growing businesses often require more working capital than historical averages suggest. Buyers may want to account for that. Sellers may feel penalized for success.
Cash vs. Debt Confusion
Founders sometimes assume all cash is theirs at closing. Buyers often assume cash required for operations stays with the business.
One-Time Adjustments
Extraordinary expenses, collections, or vendor payments near closing can distort snapshots if not addressed thoughtfully.
These issues aren’t about bad faith. They’re about interpretation.
Why “It’s Just Accounting” Is the Wrong Mindset
Working capital adjustments aren’t academic.
They directly affect:
- Cash received at closing
- Post-close true-ups
- Trust between parties
- Closing timelines
- Emotional tone of the transaction
Dismissing them as accounting details often leads to costly misunderstandings.
On the Legacy Advisors Podcast, we’ve seen more deals delayed over working capital than over valuation—simply because expectations weren’t aligned early.
Fairness Starts With Early Agreement
The single biggest factor in fair outcomes is when working capital is addressed.
Deals go smoother when:
- Target working capital is discussed pre-LOI
- Methodology is agreed early
- Historical data is shared transparently
- Seasonality is acknowledged
- Extraordinary items are identified upfront
Deals go sideways when working capital is left vague until late in diligence.
At Legacy Advisors, we push hard to surface these conversations early—before emotions and leverage get distorted by closing pressure.
Sellers’ Biggest Mistake: Treating Working Capital as “Extra”
One of the most common seller misconceptions is viewing working capital as money the buyer is “taking away.”
In reality, working capital is part of the enterprise value equation. The buyer is paying for a business that operates normally—not a shell stripped of liquidity.
When founders frame working capital as something they’re “losing,” negotiations become adversarial. When they frame it as ensuring operational continuity, conversations become far more constructive.
Buyers’ Biggest Mistake: Over-Engineering the Adjustment
Buyers can create unnecessary friction by:
- Using overly rigid formulas
- Ignoring seasonality
- Treating growth as manipulation
- Applying public-company logic to private businesses
- Over-relying on snapshots instead of trends
Fairness requires judgment, not just math.
Buyers who insist on mechanical outcomes often damage goodwill—and sometimes the deal itself.
The Role of Trust and Transparency
Working capital adjustments test trust more than most deal terms.
Founders who:
- Share clean financials
- Explain business rhythms
- Identify anomalies proactively
- Avoid last-minute manipulation
…earn credibility that makes buyers more flexible.
Buyers who:
- Explain their assumptions
- Show historical analysis
- Adjust for context
- Avoid “gotcha” tactics
…earn cooperation instead of resistance.
Trust doesn’t eliminate disagreements—but it keeps them solvable.
How Adjustments Actually Get Settled
Despite all the modeling, many working capital adjustments ultimately settle through negotiation.
Why? Because:
- Normalized ranges are subjective
- Historical data isn’t perfect
- Business dynamics change
- Precision creates false confidence
Smart parties aim for reasonable, not perfect.
In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I note that founders who insist on being technically right often lose more than those who focus on being commercially fair.
Post-Close Adjustments and the Emotional Fallout
True-ups after closing are where emotions flare.
Founders may feel:
- Nickel-and-dimed
- Misled
- Frustrated by delays
Buyers may feel:
- Exposed
- Misrepresented
- Forced to protect downside
Clear definitions, agreed methodologies, and realistic expectations reduce post-close conflict dramatically.
When to Push Back—and When Not To
Founders should push back when:
- Adjustments ignore seasonality
- Growth is treated as manipulation
- One-time items aren’t normalized
- Targets deviate meaningfully from history
- Adjustments effectively reprice the deal
Founders should be cautious when:
- The buyer’s ask aligns with historical norms
- Cash is genuinely required to operate
- The adjustment is immaterial relative to deal value
- Fighting risks delaying or derailing the deal
Fairness isn’t about winning every dollar. It’s about preserving the deal you worked years to create.
The Advisor’s Role in Keeping Things Fair
Experienced advisors play a critical role in working capital discussions—not by inflaming tension, but by grounding expectations.
At Legacy Advisors, we help founders:
- Understand buyer logic
- Frame arguments credibly
- Avoid emotional reactions
- Separate material issues from noise
- Protect outcomes without poisoning relationships
This is where experience matters more than formulas.
A Better Way to Think About Working Capital
Instead of asking, “How do I maximize cash at closing?” founders should ask:
- What level of working capital allows the business to operate normally?
- What would I expect if I were the buyer?
- Where is flexibility reasonable?
- What outcome preserves trust and certainty?
Those questions lead to better deals than positional standoffs.
Final Thought: Fairness Beats Precision
Working capital adjustments are not about perfection. They’re about fairness.
Founders who understand that—and who engage early, transparently, and pragmatically—rarely get surprised. Founders who treat working capital as an afterthought often feel blindsided, even when adjustments are reasonable.
The goal isn’t to win the adjustment.
The goal is to close the deal you intended—without unnecessary friction.
Find the Right Partner to Help Sell Your Business
Working capital adjustments are one of the most common sources of post-LOI tension—and one of the easiest to mishandle without experience. If you want help navigating these discussions fairly, strategically, and without jeopardizing your deal, Legacy Advisors helps founders manage the details that quietly shape outcomes.
Frequently Asked Questions About Working Capital Adjustments
1. Why do buyers insist on working capital adjustments in most deals?
Buyers insist on working capital adjustments to ensure the business they acquire can operate normally on Day One without requiring an immediate cash infusion. It’s not about reducing the purchase price—it’s about protecting against inheriting a liquidity shortfall that wasn’t reflected in valuation. In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I explain that enterprise value assumes a functioning business, not a stripped-down balance sheet. On the Legacy Advisors Podcast, Ed and I often note that buyers aren’t buying historical EBITDA alone; they’re buying continuity. When founders understand that framing, working capital discussions become more constructive and far less adversarial.
2. How is “normalized” working capital actually determined?
Normalized working capital is typically based on historical averages, adjusted for seasonality, growth, and known anomalies. There’s no universal formula—what’s “normal” for one business may be wrong for another. Buyers and sellers often analyze trailing months, annual averages, or same-period comparisons to establish a reasonable baseline. In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I stress that normalization is as much judgment as math. On the Legacy Advisors Podcast, we’ve seen disputes arise when parties treat normalization as a mechanical exercise instead of a contextual one grounded in how the business actually operates.
3. Is working capital effectively part of the purchase price?
Yes—whether founders realize it or not. Working capital adjustments directly affect how much cash changes hands at closing or shortly thereafter. Treating working capital as separate from price is one of the most common founder mistakes. In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I point out that any adjustment that moves cash between buyer and seller is economic, not technical. On the Legacy Advisors Podcast, we often advise founders to think of working capital as embedded in valuation discussions, not as an afterthought that gets resolved by accountants at the end.
4. What causes most working capital disputes after closing?
Most post-close disputes stem from misaligned expectations rather than bad faith. Common causes include ignoring seasonality, using a closing snapshot that doesn’t reflect normal operations, or failing to agree on treatment of one-time items. Growth can also distort working capital needs, leading buyers and sellers to draw different conclusions from the same data. In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I emphasize that ambiguity creates conflict. On the Legacy Advisors Podcast, we’ve seen that early alignment on methodology dramatically reduces post-close friction and preserves goodwill.
5. How can founders protect themselves from unfair working capital adjustments?
Protection starts with addressing working capital early—ideally before the LOI is signed. Founders should push for clear definitions, agreed methodologies, and acknowledgment of seasonality and growth. Sharing clean historical data and identifying anomalies upfront builds credibility and reduces surprises. In The Entrepreneur’s Exit Playbook (https://amzn.to/4iG7BAH), I stress that informed founders negotiate from clarity, not emotion. If you want help navigating these discussions and avoiding last-minute surprises that jeopardize outcomes, Legacy Advisors can help you manage working capital adjustments fairly and strategically.