Working capital adjustment

Editorial approval scope: The team checked current source fidelity, scope boundaries, dates, arithmetic, reader usefulness, practical workflow, and general-information limitations.

The adjustment protects an operating assumption

Many business acquisitions assume the seller will deliver enough ordinary working capital for the acquired operation to continue. The parties agree on a target, sometimes called a peg. After measuring delivered working capital under the agreement, the purchase price may move up or down.

The SBA growth guide provides general expansion resources. Its acquisition guide advises a thorough investigation of financial statements, tax returns, contracts, leases, cash flow, and purchase-price adjustments with appropriate professional help. The contract converts that diligence into the binding adjustment method.

Working capital used in a deal may differ from working capital shown in a financial statement or lending covenant. Apply the transaction definition.

Define the schedule before calculating it

A build-ready schedule identifies:

• included and excluded balance-sheet accounts
• cash, debt, debt-like items, and transaction expenses
• accounting principles, hierarchy, consistency, and estimates
• cutoff time, measurement date, and currency
• target amount and any seasonal method
• treatment of reserves, write-offs, and post-close receipts
• delivery, access, review, objection, and resolution deadlines
• expert-determination or other dispute process

Words such as “consistent with past practice” need a reference period and examples. If the agreement says a specific policy overrides past practice or general accounting rules, the schedule should show that hierarchy.

ABA assets need collection evidence

Accounts receivable often drives the asset side. Separate billed, unbilled, held, rejected, denied, appealed, paid, refunded, and recouped balances. Test service completion, documentation, authorization, provider and location eligibility, timely filing, expected reimbursement, patient responsibility, and subsequent cash.

An aged claim with weak support may need a reserve under the agreed method. A patient credit balance may be a liability. Unbilled services might be included, excluded, or treated elsewhere depending on the contract. The label in the ledger cannot settle the classification.

Review prepaid expenses, deposits, inventory, and other current assets only if the agreement includes them. Confirm that the buyer receives the related benefit.

ABA liabilities need a complete cutoff

Potential current liabilities include payroll, payroll taxes, bonuses, paid time off, vendor invoices, rent, refunds, patient credits, recoupments, and accrued professional fees. Match the accrual to work or service received before closing under the agreed policy.

Watch for late invoices, payroll crossing the close, disputed recoupments, and costs posted after close that belong before it. Keep debt, debt-like items, transaction expenses, and working capital in separate schedules so the same obligation does not reduce value twice.

A fictional closing calculation

Juniper Behavioral Care's agreement includes $620,000 of specified current assets and $410,000 of specified current liabilities at closing. Delivered working capital is $620,000 − $410,000 = $210,000.

The agreed target is $180,000, so the preliminary difference is $30,000 above target. Under a fictional dollar-for-dollar clause, consideration increases by $30,000.

That result depends on the included accounts and policy. If $40,000 of receivables lacks required support and the agreement requires exclusion, delivered working capital becomes $170,000 and the direction changes to $10,000 below target. Classification can matter more than the subtraction.

Set a controlled close process

Before signing, model the definition with historical months and difficult accounts. Before closing, assign owners for billing cutoff, cash, receivables, payroll, payables, refunds, and transaction expenses. After closing, provide the statement and supporting ledger on time.

Track each disputed item with account, amount, policy, evidence, preparer, reviewer, status, and deadline. Preserve original submissions and every revision. Settlement language should state which questions it resolves.

Require a final bridge from the trial balance to the delivered statement, every agreed reclassification, the target comparison, and the resulting purchase-price effect. Both parties should identify which numbers remain estimates and who owns post-close true-up evidence. Keep settlement authority separate from schedule preparation.

Run the target and closing estimate through a few sensitivities before money moves. Test slower collections, a larger recoupment reserve, late payroll accruals, and seasonal volume. The purpose is to find classification disputes and liquidity strain while the parties can still clarify the agreement and operating plan.

Keep each sensitivity separate from the official closing calculation.

Useful measures include scheduled accounts with current mapping divided by accounts due; closing balances tied to source evidence divided by balances tested; and disputed dollars resolved by deadline divided by disputed dollars due. Report unresolved value and age alongside percentages.

Questions owners should ask

• Which exact accounts enter the calculation?
• Which policy controls estimates and reserves?
• How was the target normalized for growth and seasonality?
• Which cash, debt, refund, or transaction items sit elsewhere?
• Who can prepare, object, decide, and settle?
• Can a reviewer reproduce every included balance?