The working capital adjustment is the most underestimated line in any sale agreement. Here's why it destroys value and how to defend yourself before signing.
I'm going to say something nobody in the industry will like, but it's the truth: most business owners who sell their company lose more money on the working capital line than on any other negotiation in the process. More than on price. More than on earn-outs. More than on non-compete clauses. And almost no one sees it coming.
I've spent years sitting at deal closings, and the pattern repeats itself: the seller agrees on a price in July, pops the champagne, and in September receives a spreadsheet that knocks €400,000, €600,000, sometimes over a million off the deal. All perfectly legal. All signed by the seller themselves. Here's what's happening.
The silent trap at deal closing
When a buyer acquires a company, they're not just buying the business: they're buying it as a going concern. And a going concern needs a certain level of working capital to operate — receivables outstanding, inventory in the warehouse, payables waiting to be settled. So far, intuitive.
The problem starts when the contract says something like: "the purchase price will be adjusted upward or downward based on the difference between working capital at closing and normalized working capital." That sentence, written in seemingly harmless ink, is the one that moves six-figure sums.
Because the buyer arrives with their M&A team, their auditors and their financial model. The seller, on the other hand, usually arrives with just their lifelong tax adviser. And the fight is uneven from minute one.
What normalized working capital really means (without the jargon)
The concept itself is simple: the buyer wants to receive the company with a level of working capital typical of its operations. If the company normally operates with €1.5 million between receivables, stock and payables, the buyer wants to find those €1.5 million on closing day. No more, no less.
If they find less, you'll be docked the difference from the price. If they find more, they'll pay you the difference. Sounds fair in theory. The problem is how that "normalized level" is calculated, and that's where the seller almost always loses.
The standard method is the 12-month average. But what if your company grew 30% in the last year? The average penalizes you. What if you have strong seasonality and closing falls in your low month? It penalizes you. What if you've spent years optimizing collections and reducing working capital? Incredibly, it also penalizes you, because your historical average is high and the buyer demands that level.
Why the buyer always wins this round (and how to change that)
My thesis is this: the working capital adjustment is not a neutral technical clause. It's a post-signing negotiation mechanism that systematically benefits the buyer, because the buyer has the resources, the time and the experts to argue every line of the balance sheet, while the seller has already signed, has already mentally counted the money, and just wants to be done.
I've seen a buyer reclassify obsolete inventory to reduce reported working capital. I've seen them argue whether an €80,000 invoice should sit as a receivable or as another debtor. I've seen them claim that a dividend paid three months earlier "distorts the normalization." Each of these fights, individually, looks minor. Added up, they take away the equivalent of five years of salary.
The way to change this isn't to wait until closing and fight. It's to negotiate the formula before the LOI. Before the buyer has invested time and money in due diligence. At that moment, you still have real negotiating leverage. A week later, you don't.
The mistake of looking only at the headline price
When an entrepreneur tells me "they're offering me 12 million for my company," my first question is never about the 12 million. It's: how is the working capital target defined in the offer?
If the answer is "we haven't discussed it yet," those 12 million are probably 11.3. If the answer is "the buyer proposes the 12-month average," probably 11.5. If the answer is "we've defined the target as the average of months comparable to the closing month, excluding the effect of last year's growth"... then yes, those 12 million have a reasonable chance of actually being 12 million.
The price you'll see in the press release, in the internal announcement, on the notary's invoice, is the headline price. The price that lands in your bank account is something else. And the difference, in mid-sized deals, is usually between 2% and 8% of enterprise value. On companies worth €10-20 million, those are life-changing figures.
My recommendation: the negotiation you need before signing the LOI
If you're in a sale process, or about to start one, here's what really matters: working capital isn't negotiated at closing, it's negotiated in the indicative offer. And to negotiate it well, you need three things.
First, an analysis of your own working capital over the last 36 months, not 12. You need to know what your real level is, your seasonality, which months are high and which are low. Without that prior work, you can't defend any formula.
Second, a target proposal of your own, written down, before receiving the buyer's. Whoever sets the first number in a negotiation has a huge advantage. This is basic psychology, but almost no one applies it in M&A.
Third, an adviser who understands the difference between debt-like items, working capital and excess cash, and who knows how to fight those three lines as if they were three different prices. Because in practice, they are.
The price of your company isn't what they offer you. It's what arrives in your account on closing day. And between one and the other, working capital is the most expensive line you'll sign. Don't sign anything until you understand exactly how it's defined.