What is a working capital adjustment and how does it affect the sale price?

Working capital adjustments are mechanisms that adjust the final purchase price based on the target company’s current assets and liabilities at closing. Parties agree on a “normal” level of working capital calculated as accounts receivable, inventory and prepaid expenses minus accounts payable and other current liabilitieshttps://mallon-lonnquist.com/blog/purchase-price-adjustments/#:~:text=A%20purchase%20price%20adjustment%20is,agreement%20and%20the%20closing%20date. Cash is often excluded, and the agreed working capital target may be based on historical averageshttps://bdblaw.com/understanding-working-capital-adjustments/#:~:text=In%20planning%20for%20the%20sale%2C,from%20the%20working%20capital%20calculation. If actual working capital at closing is above the target, the purchase price may increase; if it is below the target, the price may be reducedhttps://mallon-lonnquist.com/blog/purchase-price-adjustments/#:~:text=A%20purchase%20price%20adjustment%20is,agreement%20and%20the%20closing%20date. Defining which accounts are included and how they are valued is essential to avoid disputeshttps://mallon-lonnquist.com/blog/purchase-price-adjustments/#:~:text=includes%20confirming%20which%20accounts%20and,everything%20will%20be%20included%20in. Working capital adjustments ensure the buyer receives a business with sufficient working capital to operate without injecting extra cash and protect the seller from leaving excess working capital on the balance sheet. Prime 100’s experienced advisors negotiate and structure working capital targets that fit your business and market conditions. We analyse historical working capital trends, define included accounts and help you document the calculation so there are no surprises at closing. Our customer-first approach answers your questions and ensures you understand how this adjustment affects your sale price.