VC & PE Glossary
What Is Working Capital Adjustment?
Updated
Definition
A working capital adjustment is a post-closing purchase price change in M&A when the company's actual net working capital at close differs from the agreed target or peg.
Useful for: Founders, Investors
A working capital adjustment true-ups the purchase price after close when net working capital differs from the negotiated peg — protecting buyers from sellers draining liquidity pre-close.
How it works
Typical M&A mechanics:
- Parties agree peg — target net working capital (often trailing average)
- Closing balance sheet measured within days of close
- Adjustment: if actual NWC < peg, price drops $1 for $1 shortfall (within caps); if actual > peg, seller may receive add-back per collar rules
Definitions matter — which accounts count as current, treatment of debt-like items, and normalization for seasonality. Disputes go to independent accountants per purchase agreement.
Founders running asset-light SaaS may see minimal adjustments; inventory-heavy or services businesses with large AR/AP swings face bigger true-ups.
Venture-backed sellers should manage working capital in the final 60–90 days — accelerating payables or delaying receivables collection hurts adjustment math even if cash feels high.
Why it matters
- Founders: Model proceeds net of adjustment scenarios in exit planning. Communicate with operators so close-week accounting matches peg methodology.
- Investors: Sponsors enforce pegs to avoid funding immediate post-close liquidity injections — adjustment economics are part of IRR.
Common mistake
Treating enterprise value as all-cash to sellers without peg collar — a $2M working capital miss can erase expected distributions.
Related ideas
See also working capital peg, working capital, and locked box alternatives.
Related terms
- Working Capital — Working capital is current assets minus current liabilities — the short-term liquidity buffer a company uses to fund inventory, receivables, and payables in day-to-day operations.
- Working Capital Peg — A working capital peg is the target net working capital level agreed in an M&A deal — the baseline used to calculate post-closing purchase price adjustments.
Common questions
Short answers for founders, LPs, and operators