Working Capital Adjustments: What You Actually Receive at Settlement

You've agreed on a purchase price. The buyer has signed the heads of agreement. The number is clear, written down, and you understand what you're being paid for your business. Then, at settlement, the buyer's accountant produces a working capital statement, and the final amount deposited into your bank account is $200,000 less than the purchase price you agreed to.

This is not fraud. It's not a mistake. It's a working capital adjustment, and if you didn't understand the mechanism when you agreed to the deal, you're now discovering one of the most misunderstood parts of selling a business in Australia. The working capital adjustment is a post-settlement reconciliation that corrects for differences between the working capital your business had when you agreed on the price and the working capital it has when you hand over the keys.

The adjustment is legitimate, necessary even, but it's also the source of more settlement disputes than almost any other deal term. The reason is simple: working capital is measured at a point in time, the day of settlement, but the mechanism for how it's calculated is agreed months earlier, when sellers don't yet understand what they're signing up for. By the time you see the actual adjustment calculation, your negotiating position is gone. The deal has closed. The only question is whether you accept the adjustment as calculated or spend the next six months in dispute over it.

This article explains what working capital adjustments are, why they exist, how they're calculated, and specifically what you need to negotiate before you sign to ensure the adjustment reflects reality rather than a buyer's favourable interpretation of your balance sheet.

What Is a Working Capital Adjustment and Why Does It Exist?

Working capital is the difference between your current assets and your current liabilities. Current assets are things like accounts receivable, inventory, and prepaid expenses. Current liabilities are accounts payable, accrued expenses, and unearned revenue. The difference between the two is the capital your business uses to operate day to day.

When a buyer agrees to purchase your business, they're agreeing to buy an operating entity with a certain level of working capital in place. If your business normally carries $300,000 in accounts receivable and $150,000 in accounts payable, the buyer expects that at settlement, the business will have approximately that level of working capital available. The purchase price assumes this.

The problem is that working capital fluctuates. Between the date you agree on a price and the date of settlement, your receivables might drop to $200,000 because a major customer paid early. Or your inventory might spike to $180,000 because you placed a bulk order. The business the buyer receives at settlement has different working capital to the business they agreed to buy.

The working capital adjustment corrects for this difference. If working capital at settlement is lower than the agreed baseline, the buyer pays less. If it's higher, they pay more. The adjustment ensures that the buyer receives the business with the level of working capital they expected when they agreed to the purchase price.

This is fair in principle. The buyer shouldn't have to pay full price for a business and then immediately inject an extra $100,000 of working capital because the seller collected all the receivables but left the payables outstanding. Similarly, the seller shouldn't have to leave excess working capital in the business without being compensated for it. The working capital adjustment solves this problem, but only if it's defined correctly before you sign.

How the Baseline ("Target" or "Peg") Is Set

The working capital adjustment compares the actual working capital at settlement to a baseline, often called the "target working capital" or the "peg". The baseline is the reference point that determines whether the adjustment favours the buyer or the seller.

In Australian SME transactions, the baseline is typically set as either:

• The trailing twelve-month average of working capital, calculated from the business's monthly balance sheets over the previous year.
• The working capital position at a specific historical date, often the date of the most recent audited or management accounts provided during due diligence.
• A negotiated dollar amount agreed between buyer and seller based on what both parties consider "normal" for the business.

The choice of baseline matters enormously. If your business has seasonal working capital swings, a historical point-in-time baseline set during a low-working-capital period (for instance, just after a major receivables collection) will result in a lower peg. At settlement, if working capital has returned to its normal level, you'll be penalised for what is actually just the ordinary operation of the business cycle.

Similarly, if the baseline is set as a trailing twelve-month average, but your business has been growing rapidly, the average will be lower than the current working capital requirement. The buyer receives the business with the working capital it needs to operate at its current scale, but you're not compensated for the difference between the historical average and the present reality.

What Gets Included in the Working Capital Calculation

This is where most settlement disputes begin. The acquisition agreement will specify that working capital is to be calculated "in accordance with the agreed methodology", but the methodology itself is often under-defined. The result is that buyer and seller disagree at settlement on what should and shouldn't be included in the calculation.

The most common points of dispute are:

Cash and Cash Equivalents

Cash in the business bank account is almost always excluded from the working capital calculation. The buyer typically pays for the business on a "debt-free, cash-free" basis, meaning they don't acquire the cash on the balance sheet, and they don't assume any debt. You take the cash with you when you leave.

The dispute arises with near-cash items: term deposits that mature within 30 days, short-term investments held in offset accounts, and foreign currency holdings. If these are excluded from working capital, you keep them. If they're included, they transfer to the buyer as part of the business, and you're compensated via the working capital adjustment. The treatment needs to be specified before you sign.

Inventory Valuation

Inventory is included in working capital, but valuing it is not straightforward. The agreement will typically specify that inventory is to be valued "at the lower of cost or net realisable value", which is standard accounting treatment. But what counts as "cost"? Does it include freight? Warehousing? Import duties? If your inventory valuation at settlement differs from the buyer's accountant's valuation because you've used different cost assumptions, the working capital adjustment changes by the amount of the difference.

For inventory-heavy businesses (retail, wholesale, distribution), this can mean adjustments of $50,000 or more based purely on valuation methodology differences. The fix is to include a detailed inventory valuation schedule in the acquisition agreement, specifying exactly which costs are included and how damaged or obsolete stock is to be treated. Learn more about hidden costs that reduce your proceeds.

Prepaid Expenses and Accruals

Prepaid expenses, things like rent paid in advance, insurance premiums, and annual software subscriptions, increase working capital. Accrued expenses, things like employee leave entitlements, accrued supplier invoices, and GST payable, decrease it.

The dispute typically arises over whether certain items are "normal course" or "one-off". For instance: if you've prepaid six months of rent because the landlord required it at lease renewal, is that treated as normal working capital, or as an extraordinary item excluded from the adjustment? If you've accrued a bonus for a key employee that's payable after settlement, is that included in working capital liabilities, or excluded because it relates to a pre-sale incentive?

These aren't edge cases. They're routine items that appear on almost every SME balance sheet. The acquisition agreement should specify the treatment of material prepayments and accruals explicitly, ideally by listing them in a schedule with the agreed treatment beside each one. Learn more about how earnouts factor into the equation.

Intercompany Balances

If your business has related entities (a holding company, a property trust, a separate trading entity), there are often intercompany loans or payables on the balance sheet. At settlement, these need to be either cleared or excluded from the working capital calculation.

The buyer will typically require that intercompany balances be settled before settlement, so they're acquiring a clean entity without obligations to related parties they don't control. If that's not possible, the treatment needs to be specified: are intercompany receivables included in working capital (meaning you're compensated for them), or excluded (meaning they're written off)?

For family businesses with informal intercompany arrangements, this can be a material issue. A $100,000 director's loan that's been sitting on the balance sheet for years might be treated as working capital by the seller but excluded by the buyer. Clarify the treatment before you sign.

Timing of the Calculation and When the Adjustment Is Finalised

The working capital adjustment is calculated after settlement. The buyer takes control of the business, and within a defined period (typically 30 to 60 days), their accountant produces a completion balance sheet showing the actual working capital position at the settlement date.

You, as the seller, then have a review period (typically 10 to 20 business days) to either accept the calculation or dispute it. If you dispute it, the acquisition agreement will specify a dispute resolution mechanism, usually involving a jointly appointed independent accountant who reviews both positions and issues a binding determination.

The problem with this process is that by the time you see the buyer's calculation, you no longer have access to the business's records. The buyer controls the accounting system, the inventory counts, the aged receivables reports, everything you would need to verify whether their calculation is accurate. If you didn't negotiate the right to audit or verify the completion accounts before you signed, you're relying entirely on the buyer's accountant's honesty.

Most buyers are honest. Most completion accounts are prepared accurately. But the risk exists, and the only protection is contractual. The acquisition agreement should give you, or your accountant, the right to access the business's financial records during the review period for the purpose of verifying the completion accounts. Without that right, you're accepting the buyer's calculation on trust.

How Large Can the Adjustment Be?

For most Australian SME transactions, the working capital adjustment is typically between 2% and 8% of the purchase price, but it can be significantly larger for inventory-heavy or project-based businesses.

A $3 million purchase price with a working capital adjustment of 5% means a potential swing of $150,000 in either direction. That's not a rounding error. It's a material amount that, if you're not expecting it, can turn a financially comfortable exit into one where you're immediately under pressure.

The size of the adjustment depends primarily on three factors:

• How capital-intensive your business is. A wholesale distribution business with $800,000 in inventory and $400,000 in receivables will have larger working capital swings than a consulting business with minimal inventory and monthly billing cycles.
• The gap between the settlement date and the baseline date. If the baseline was set six months before settlement and your business has grown in the interim, the working capital at settlement will be higher, and you'll be compensated. If it's contracted, you'll owe the buyer an adjustment.
• Seasonal timing. If settlement occurs at a point in your business cycle when working capital is naturally high (for instance, after placing seasonal inventory orders but before the corresponding sales), the adjustment will favour you. If it's naturally low (after receivables have been collected but before the next sales cycle), it will favour the buyer.

Business Type	Typical Working Capital Adjustment (% of Purchase Price)	Key Driver
Professional Services	2–4%	Primarily receivables and accrued WIP
Retail / Wholesale	5–10%	Inventory levels and payment terms
Manufacturing	6–12%	Raw materials, WIP, finished goods inventory
SaaS / Digital	1–3%	Minimal inventory, mostly prepaid/deferred revenue
Construction / Projects	8–15%	Progress billings, retentions, material deposits

The Debt-Free, Cash-Free Purchase Price Structure

Most Australian SME acquisitions are structured on a "debt-free, cash-free" basis. This means the buyer is acquiring the business without assuming any debt, and without acquiring any cash or cash equivalents on the balance sheet. The seller clears all debt before settlement, and takes any surplus cash with them when they leave.

This structure simplifies the transaction, the buyer doesn't need to refinance your existing debt, and you don't need to leave cash in the business to fund operations post-settlement. But it interacts with the working capital adjustment in a way that catches many sellers by surprise.

If your business normally operates with a line of credit or an overdraft facility to manage working capital fluctuations, and you're required to clear that debt at settlement, you may need to inject cash into the business to do so. That cash injection increases the working capital at settlement, which increases the working capital adjustment in your favour. But it's your own cash you've injected, and the adjustment compensates you for it only to the extent that working capital at settlement exceeds the baseline.

Here's a worked example:

• Your business has a $100,000 overdraft facility that's typically drawn to $60,000.
• The working capital baseline (peg) is set at $200,000, reflecting your normal working capital position when the overdraft is at its typical level.
• At settlement, the overdraft must be cleared. You inject $60,000 of your own cash to do so.
• Working capital at settlement is now $260,000 ($200,000 normal working capital + $60,000 cash injection to clear the overdraft).
• The working capital adjustment is $60,000 in your favour, compensating you for the excess working capital.

In this scenario, the adjustment works correctly: you injected cash, and you were compensated for it. But if the baseline had been set incorrectly, say at $180,000 instead of $200,000, the working capital at settlement ($260,000) would exceed the baseline by $80,000, and you'd receive an $80,000 adjustment. It looks like a windfall, but it's actually compensating you for $60,000 of cash you injected plus $20,000 of working capital the buyer is receiving above what they expected.

The point is: debt-free, cash-free structures require careful attention to how the baseline is set and how debt clearance affects working capital at settlement. If your business relies on debt to fund normal working capital, start weaning the business off that debt well before you go to market, so the baseline reflects the true working capital requirement without debt in the mix.

Normalisation Adjustments vs Working Capital Adjustments

These are two different mechanisms, and they're often confused. A normalisation adjustment corrects for one-off, non-recurring items that distort EBITDA. A working capital adjustment corrects for differences in the balance sheet position at settlement versus the agreed baseline. They operate independently, and both can apply in the same transaction.

For instance:

• You sold a piece of equipment and recognised a $50,000 gain on sale in the most recent financial year. That gain is excluded from adjusted EBITDA via a normalisation adjustment, because it's non-recurring.
• At settlement, your accounts receivable balance is $80,000 lower than the baseline because a major customer paid early. That's corrected via a working capital adjustment.

The normalisation adjustment affects the valuation (and therefore the purchase price). The working capital adjustment affects the final amount you receive at settlement, given the agreed purchase price. Both matter, but they're addressing different issues.

Common Disputes and How to Avoid Them

Working capital adjustment disputes most commonly arise in four scenarios:

1. Aged Receivables Treatment

The buyer's accountant produces a completion balance sheet that writes down receivables over 90 days as uncollectable, reducing working capital. You argue that those receivables are collectable, they're just from slow-paying customers who always pay eventually. The dispute drags on for months.

The fix: specify in the acquisition agreement that receivables are to be included at face value unless they meet specific criteria for impairment (for instance, customer is in liquidation, or receivable is over 180 days with no payment plan in place). Attach an aged receivables report from the most recent month-end as a schedule, and agree that the treatment of aged receivables in the completion accounts will be consistent with that historical report.

2. Inventory Obsolescence

The buyer's physical stock count at settlement identifies $40,000 of inventory as damaged or obsolete, and writes it off, reducing working capital. You argue that the stock is saleable, just slow-moving. Without access to the warehouse post-settlement, you can't verify the buyer's claim.

The fix: conduct a joint physical inventory count on the settlement date, with both parties' representatives present. The acquisition agreement should specify that any inventory write-downs for obsolescence require mutual agreement or photographic evidence of damage. Slow-moving stock that is otherwise in good condition is valued at cost, not written down.

3. Allocation of Overhead Costs

This is more common in larger transactions, but it appears in SME deals where the buyer is acquiring a division or business unit rather than a standalone entity. The buyer allocates group overhead costs to the acquired business when preparing the completion balance sheet, inflating accrued expenses and reducing working capital.

The fix: specify that the completion balance sheet is to be prepared on a standalone basis, with no allocation of group costs that were not borne by the business pre-acquisition. If overhead allocation is unavoidable (for instance, because the business shared facilities with other group entities), the methodology for allocation must be agreed before settlement, not invented afterwards.

4. Timing Differences in Revenue Recognition

For project-based or subscription businesses, revenue recognition timing can create working capital disputes. The buyer might argue that revenue invoiced in the final week before settlement relates to work performed post-settlement, and should be excluded from working capital (or treated as unearned revenue, a liability). You argue it's revenue from the period you controlled the business.

The fix: agree that revenue recognition for the completion balance sheet will follow the same accounting policy the business has used historically. Attach the most recent management accounts as a schedule, and specify that the completion accounts will be prepared on a consistent basis. If the buyer wants to change revenue recognition policy post-acquisition, that's their right, but it doesn't retroactively apply to the settlement calculation.

Protecting Yourself: What to Negotiate Before You Sign

Working capital adjustments are inevitable in most business sales, but the specific terms are entirely negotiable. The following provisions should be in your acquisition agreement before you sign:

1. A clearly defined baseline (peg). Specify whether it's a historical date, a trailing average, or a negotiated amount. Attach the calculation as a schedule.

2. A worked example of the working capital calculation. Take your most recent balance sheet, apply the agreed methodology, and produce a dollar figure. Both parties sign off on it. This becomes the reference for what's included and how it's measured.

3. Explicit treatment of material items. List inventory, aged receivables, prepayments, accruals, and intercompany balances, and specify how each is treated in the calculation.

4. Right to verify the completion accounts. You or your accountant must have access to the business's financial records during the review period to verify the buyer's calculation.

5. A defined dispute resolution process. If you and the buyer disagree on the completion accounts, the matter goes to an independent accountant (not arbitration, not litigation). The accountant's determination is final and binding, and their fees are split equally or borne by the party whose position was further from the final determination.

6. A cap on the adjustment (for smaller deals). In transactions under $2 million, consider negotiating a cap on the working capital adjustment, for instance, +/- 10% of the baseline. This limits your downside risk and simplifies the settlement process. Buyers will resist this, particularly if working capital is genuinely volatile, but it's worth proposing.

These protections are standard in professionally advised transactions. If your buyer resists them, that's a signal. Either they're not sophisticated, in which case you need independent advice before proceeding, or they're sophisticated and they're planning to use the working capital adjustment as a post-settlement price reduction mechanism. Neither scenario is one you want to be in without strong contractual protection.

What You Actually Receive at Settlement

When you sell your business, the amount deposited into your account at settlement is not the headline purchase price. It's the purchase price, adjusted for:

• The working capital adjustment (up or down, depending on actual vs baseline working capital)
• Any debt you're required to clear before settlement
• Any transaction costs deducted at settlement (broker fees, legal costs if agreed to be deducted from proceeds)
• Any escrow or retention amounts held back to secure warranties or earnouts

For a $3 million purchase price, it's entirely normal for the settlement amount to be $2.6 million after adjustments. That's not the buyer cheating you. It's the mechanics of how business sales work. But you need to know this before you commit, not when you're sitting at settlement and wondering where $400,000 of your expected proceeds went.

Understanding the working capital adjustment, and negotiating its terms correctly, is one of the most important things you'll do in the sale process. It's technical, it's boring, and it doesn't feel as important as negotiating the headline price. But it directly determines what you walk away with, and unlike the purchase price, it's calculated after you've lost your negotiating leverage.

Get it right before you sign, or accept that the buyer's accountant will define what "right" means at settlement.