The purchase price a client agrees to rarely survives to closing unchanged, and working capital is one of the most common reasons it moves. Many owners have never heard the term until it appears in their deal.
For advisors, that surprise is preventable. Working capital reflects months of ordinary operating decisions, and a buyer will measure it against the business’s own history. The conversation belongs early in exit planning, well before active negotiations.
A recent article from Exit On Top breaks down what working capital is, why buyers use it to adjust the purchase price, and how sellers can prepare before going to market.
Here is what advisors working with business owners preparing for a sale need to understand:
The Agreed Price Is a Starting Point
Working capital is current assets, such as cash, accounts receivable, and inventory, minus current liabilities, such as accounts payable and other short term obligations. Buyers expect to receive a business that can keep operating without an injection of cash the day after closing, so they typically set a working capital target, often called a peg.
At closing, actual working capital is compared to that peg. A shortfall reduces the purchase price by the difference, while a surplus may produce additional proceeds. Advisors who model a client’s after-sale plans should treat the headline price as a figure that can still move in either direction.
Pre-Sale Behavior Is Part of the Record
The peg is often based on the business’s historical average over roughly the past twelve months. The mechanism also protects buyers from a seller who collects every outstanding invoice, delays paying vendors, or lets inventory run low to boost the payout at closing.
An owner who suddenly tightens collections or stretches payables before a sale may think it helps, but buyers and their advisors will look closely at those patterns during diligence. CPAs and consultants should encourage clients to track working capital trends well before going to market, so everyone knows what a normal, healthy level looks like, and to avoid unusual changes to collection or payment timing in the months leading up to a sale.
Define the Peg Before It Is Too Late to Negotiate
The article recommends that the working capital target and the method for calculating it be clearly defined and negotiated, ideally starting in the letter of intent. M&A advisors and the client’s CPA should review the proposed peg and calculation method together, so the target reflects how the business actually operates and there are no surprises later.
Some Proceeds Arrive After Closing
The true up happens after the deal has technically closed, once the final numbers are confirmed. Working capital is also only one of several adjustments that can affect a seller’s final proceeds.
Wealth planners and estate planning attorneys should account for that timing and uncertainty rather than building plans around the headline number on day one.
Working capital sits at the intersection of operations, accounting, deal terms, and personal financial planning. When M&A advisors, CPAs, wealth planners, and attorneys coordinate early, owners go to market understanding their numbers and negotiate from a stronger position. That kind of early, multidisciplinary coordination is exactly what the XPX community is built to support.
Read the full article here:
What Is Working Capital and Why Buyers Use It to Adjust Your Purchase Price
