What Is Working Capital Adjustment? Definition

What is a working capital adjustment?

A working capital adjustment is an M&A mechanism that adjusts the purchase price based on the target company's net working capital at closing, compared to a negotiated target or peg. For consulting firm transactions, working capital typically includes accounts receivable minus accounts payable and accrued expenses. Adjustments ensure the buyer receives a business with normal operating cash, and the seller doesn't artificially inflate or deplete working capital before closing.

Numetix is the expert-led, AI-powered, human-in-the-loop bookkeeping layer that keeps receivables, payables, and accruals reconciled, so the working capital figures in a deal can be supported.

Key characteristics

Compares closing working capital to the agreed-upon target/peg
Consulting firm WC typically: AR minus AP and accrued expenses
Excess working capital increases seller proceeds; a deficit decreases them
Usually determined post-closing with true-up payment
The target is often set at the trailing 12-month average
Can significantly impact final purchase price (often $50,000-$500,000)

Why it matters for service firms

Working capital adjustments prevent manipulation and ensure fair dealing in consulting firm sales. Without adjustment mechanisms, a seller could accelerate collections and delay payments before closing, extracting cash that the business needs to operate. Conversely, a buyer might delay closing until AR is collected, leaving the seller with uncollected receivables. The adjustment mechanism ensures the buyer receives a normally functioning business and the seller receives fair value for the actual working capital delivered.

Real-world example

Vista Consulting agrees to sell for an enterprise value of $3.5M, with a working capital target of $280,000 (12-month average). At closing, actual working capital is $345,000: AR of $420,000 minus AP and accruals of $75,000. The $65,000 excess ($345,000 - $280,000 target) increases seller proceeds. However, the buyer's accountants dispute one $40,000 receivable as uncollectible (over 120 days). After negotiation, they agreed to an adjusted working capital of $315,000, resulting in an additional $35,000 payment to the seller—final proceeds: $3.535M. The working capital mechanism added meaningful value while ensuring both parties had clear expectations.

Frequently asked questions

How is the working capital target set?

Often as an average of working capital over a recent period, such as the trailing twelve months, adjusted for seasonality and one-time items. Buyers and sellers negotiate the target, so each side should understand how it is calculated and which accounts are included.

What happens if closing working capital is above or below the target?

If it is above the target, the purchase price usually increases by the excess. If it is below, the price usually decreases by the shortfall, often settled in a post-closing true-up. The purchase agreement defines the mechanics, so review it with an attorney.

Working Capital Adjustment