Working capital adjustment: the clause that quietly cuts your exit cheque

Who this is for: sellers in a live process, before the sale and purchase agreement is drafted.

It compares the working capital you deliver at closing against a "normal" level agreed months earlier. Deliver less than the target and the price comes down, pound for pound.

One of the least understood clauses in a sale. One of the most expensive.

Whoever defines "normal" controls the adjustment

The target is usually an average of your recent months, presented as normal.

If your business is seasonal, an average across the wrong months sets a target you cannot meet in the closing month.

What counts is what the agreement defines

Not what your management accounts say.

1. Which receivables count, and at what ageing
2. Whether deferred revenue sits in working capital or in debt-like items
3. How accrued bonuses and commissions are treated
4. Whether tax balances are in or out
5. What happens to intercompany and related-party balances

Deferred revenue is the one to watch.

Argued as debt-like, it reduces equity value. Argued as working capital, it may not.

Agree it in the LOI, not the SPA

By the time lawyers are drafting, you are tired, exclusive, and months into a process. That is the worst moment to discover the mechanism moves your price.

Frequently asked questions

Who sets the normalised working capital target, and can you challenge it?
The buyer usually proposes it, from a historical average they select. You can challenge both the period and what sits inside the definition — but only before it is agreed.

Is deferred revenue working capital or debt?
Negotiated. Buyers argue debt-like because delivery still costs money.

When should the target be agreed?
At LOI stage. Leaving it to the SPA hands the definition to the buyer's drafters.