Key Insight
The NWC adjustment is where many post-close disputes originate. The methodology seems simple — but the definition of what counts as working capital, and what the target should be, is a negotiation with real dollar consequences.
Why NWC Adjustments Exist
Without a working capital mechanism, a seller could drain receivables, delay paying vendors, and reduce inventory in the weeks before close — leaving the buyer with a technically-agreed price but a business that needs immediate cash infusion to operate.
The NWC adjustment creates a financial handcuff: the seller is incentivized to maintain normal working capital levels because deviations reduce what they receive.
How It Works
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Set the target: Negotiated in the LOI or APA — typically based on the business's historical average NWC, sometimes the LTM average. Example: $350,000.
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Measure at close: Actual NWC on the closing date is calculated from the closing balance sheet.
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True-up:
- Actual NWC > Target → buyer pays more (seller delivered extra working capital)
- Actual NWC < Target → seller receives less (buyer gets a credit for working capital shortfall)
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Post-close adjustment period: Typically 60-90 days post-close for the parties to finalize the closing balance sheet and resolve disputes.
Common Disputes
- Which current assets/liabilities are included in the NWC calculation
- How to value inventory (cost vs. net realizable value)
- Treatment of deferred revenue — is it a liability or excluded?
- Seasonality: whether the target should be seasonally adjusted
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