Quick answer
A working capital adjustment changes the purchase price of a business, dollar for dollar, by the difference between the net working capital actually delivered at completion and an agreed target (the 'peg'). If debtors plus stock minus trade creditors come in above the peg, the buyer pays more; below it, the price falls. For a seasonal business, how the peg is set and when completion happens can swing the final price by a large amount, and any top-up usually falls due months after the acquisition loan has drawn.
Key points
- The adjustment is dollar for dollar: every $1 of working capital above the peg is $1 more on the price.
- A 12-month average peg plus a completion date at the seasonal peak means the buyer pays a top-up.
- The definition (what counts as working capital) matters as much as the number.
- A top-up is usually payable after completion accounts are agreed, so the acquisition loan has already drawn. Arrange headroom beforehand.
Buyers negotiate the headline price hard and then skim the working capital clause. That’s a mistake. In a share purchase of an established SME, the working capital adjustment can move the final cheque by more than the last round of price haggling, in either direction, and the payment often falls due after the acquisition finance has already drawn.
This guide covers how the mechanism works, where the peg comes from, why completing at the seasonal peak costs you money, and how to arrange the funding before you sign.
What is a working capital adjustment, in plain terms?
A business is usually sold “cash-free, debt-free, with a normal level of working capital”. The seller keeps the surplus cash and repays the borrowings. In return, the seller has to leave enough debtors and stock (net of trade creditors) in the business for it to keep trading the day after completion without the buyer topping it up.
The agreed “normal” figure is the target, or peg. After completion, someone prepares completion accounts showing the actual net working capital on the completion date. The price is then adjusted:
| Completion working capital vs peg | Price effect | Who pays whom |
|---|---|---|
| Above the peg | Price increases | Buyer pays the seller a top-up |
| Equal to the peg | No change | Nobody |
| Below the peg | Price decreases | Seller refunds the buyer (or a retention is released to the buyer) |
The logic is fair. Without it, a seller could chase every debtor and run stock down before completion, pocket the cash, and hand over a business that needs immediate refilling.
What counts as “working capital” in the clause?
The definition decides the outcome more than people expect. The usual building blocks:
| Usually included | Usually excluded (treated as cash or debt) | Often negotiated |
|---|---|---|
| Trade debtors, net of a doubtful-debt provision | Cash at bank | Employee leave provisions |
| Stock at the lower of cost and net realisable value | Bank loans, overdrafts, equipment finance | GST and PAYG payable or refundable |
| Prepayments | Related-party and shareholder loans | Customer deposits and income received in advance |
| Trade creditors and accrued expenses (deducted) | Income tax balances | Debtors older than 90 days |
Three items cause the most disputes:
- Ageing debtors. If old invoices count at face value, the buyer pays for receivables it may never collect. Specify a provisioning rule or exclude balances past an agreed age.
- Slow and obsolete stock. Business Queensland’s due diligence checklist tells buyers to check stock, “including stock not fully paid for”, and to look at accounts receivable and payable. Agree how dead stock is written down before completion, not afterwards.
- Accrued leave. Whether employee entitlements are deducted as debt or sit inside working capital can be worth a significant amount in a business with long-tenured staff. Decide which side of the line they fall on, and make sure the same item isn’t counted twice.
Also insist on an accounting policies hierarchy: specific policies listed in the agreement first, then consistency with the last annual accounts, then accounting standards. Most completion-account arguments come down to the seller saying “we’ve always done it this way” while the buyer points to a standard.
How is the peg set, and why does the method matter?
The peg is normally derived from history: the average of month-end net working capital over some look-back period. The method you pick can move the number a long way, especially in a seasonal business.
Illustrative only; no real business. An industrial and electrical distributor turning over about $14 million builds stock from September for the pre-Christmas project rush and collects heavily in January and February. Its month-end net working capital ranges from about $1.6 million in February to about $2.5 million in November, and averages about $2.0 million across the year. The share sale is set to complete on 30 November, and the business actually delivers $2.5 million of working capital that day.
| Peg method | Peg | Adjustment at a 30 Nov completion |
|---|---|---|
| 12-month average of month-ends | $2.0m | Buyer pays a $500k top-up |
| Average of the last 3 month-ends (Sep–Nov) | $2.3m | Buyer pays a $200k top-up |
| Prior years’ November month-ends (seasonal match) | $2.4m | Buyer pays a $100k top-up |
Nothing about the business changes between those rows. Only the drafting changes. The seller isn’t being greedy with a 12-month average either: a November handover genuinely gives the buyer more stock and debtors than average, and those convert to cash over summer. The problem for the buyer is timing. The top-up is cash out a few months after completion, and the debtors it paid for come back in gradually.
The same calendar logic runs the other way. Complete in February, at the trough, against a 12-month average peg, and the seller will owe you money while you’re rebuilding stock for autumn. Either way, model the completion date and peg method together before you agree to either.
What happens after completion?
The typical sequence in an Australian SME share sale:
- Estimate at completion. The parties agree an estimated working capital figure and the price paid on the day is adjusted for it, so the later true-up is smaller.
- Completion accounts. Usually prepared by the buyer within a set period (often 30 to 90 days) because it now controls the books. Attend the completion stocktake in person, or have someone you trust there.
- Review and dispute. The seller gets a window to object to specific items.
- Expert determination. Unresolved items go to an independent accountant acting as an expert, whose decision is usually binding.
- Payment. The balance is paid within a short period of the figure becoming final, sometimes from a retention (part of the price held back at completion).
From signing to final payment can easily take four to six months. A retention protects the buyer if working capital comes in low. A buyer who expects to owe a top-up should plan for that payment from the start.
Want a second view on how an adjustment would hit your cash once the acquisition debt is in place? Outline the deal for a specialist. There’s no credit check for an initial enquiry.
Share purchase or asset purchase: does it change things?
Yes. The adjustment above is mainly a share sale mechanism, because the company keeps its debtors, creditors and stock.
In an asset sale the seller commonly keeps its own debtors and pays its own creditors, so the buyer starts with no receivables and has to fund the whole trading cycle from day one. Stock is usually bought separately at a value set by a completion-day stocktake. That count works like a small working capital adjustment: if the warehouse is fuller than the estimate in the contract, you pay more on the day. If the sale qualifies as a GST-free going concern, the ATO’s conditions need to be met, including written agreement between the parties. Have your adviser confirm this, because a failed going-concern treatment adds GST to the cash you need at settlement.
business.gov.au’s guide to buying a business suggests checking whether on-hand inventory is included in the purchase and what condition it’s in. In an asset deal that check directly sets the cash you need at completion.
How does a lender look at the adjustment?
An acquisition lender sizes its facility around the price, the combined group’s cash flow and the security available. The adjustment complicates that in three ways:
- The price isn’t final at drawdown. The lender funds a number that may rise later. If the facility has no room for that, the top-up comes out of operating cash at the worst moment.
- Low working capital at completion is a credit warning. A refund looks good on paper but usually means the business was handed over short of stock or with debtors already collected. The buyer has to rebuild immediately, and the refund may take months to arrive.
- Covenants start on day one. A top-up paid from the overdraft in the first quarter can squeeze headroom before the first covenant test. Run the scenario through the working capital cycle calculator and your cover numbers before signing.
Show the lender you’ve thought about it. In the funding proposal, include the peg, the method behind it, your expected completion figure and a downside case. Then name the source of funds for a top-up.
How do you fund a top-up you can see coming?
Arrange it before completion. Typical options for an established buyer:
| Option | Fits when | Watch for |
|---|---|---|
| Headroom in the acquisition facility | The lender agrees a contingency at approval | Unused contingencies may lapse at a set date |
| Working capital facility or line of credit | Top-up is modest and debtors will repay it within months | Limit sized on pre-deal turnover may be too small |
| Property-secured facility ($20,000 to $5,000,000) | Top-up is larger or the group is already near its cash-flow limits | Allow time for valuation and documents |
| Retention or set-off negotiated with the seller | Seller accepts the top-up is netted against deferred consideration | Interacts with any earn-out terms |
If completion itself is at risk because the bank’s approval is running behind the contract date, that’s a separate problem. See bridging finance to settle a business purchase.
A buyer’s checklist before signing
- Get 24 to 36 month-ends of net working capital, built using the agreement’s own definition
- Test the peg against the actual completion month, not just the annual average
- Agree debtor-ageing and stock write-down rules, and the treatment of leave provisions
- Insist on an accounting policies hierarchy and an expert-determination clause
- Consider a retention, a de minimis band or a cap
- Attend the completion stocktake
- Line up and document the source of funds for a top-up before completion
Buying a business? Let’s make sure the cash lines up
A well-drafted working capital clause protects both sides. The buyer still has to fund the outcome, though, sometimes months after the acquisition loan has drawn and while the new business is still settling in. We work with buyers on that whole picture: the acquisition debt, the working capital line next to it, and property-secured capital if the bank’s appetite runs out before the deal does.
The enquiry form takes about 60 seconds, and there’s no credit check when you first enquire. Your deal details aren’t sent to a pile of lenders. One specialist reads the file, considers the structure, the peg and your security, and then calls you. Please fill the form in accurately, especially the purchase price, the target’s turnover and any existing debt, so the first conversation starts with options that can actually work.
Frequently asked questions
What is a working capital peg?
The peg is the level of net working capital (usually trade debtors plus stock, less trade creditors and accruals) that buyer and seller agree is normal for the business. The price assumes the business is handed over with that amount in it. Any shortfall or excess at completion adjusts the price.
Is the working capital adjustment dollar for dollar?
Usually, yes. Most sale agreements adjust the price by the full difference between actual and target working capital, sometimes with a small de minimis band before anything is paid and occasionally a cap. Check the clause rather than assuming.
Who prepares the completion accounts?
The agreement decides. Often the buyer prepares them within a set period after completion, because it now controls the books, and the seller has a review period to dispute items. Unresolved disputes typically go to an independent accountant acting as an expert rather than to court.
Does a working capital adjustment apply to an asset purchase?
Less often in the same form. In an asset deal the seller commonly keeps its debtors and pays its own creditors, and stock is bought at a value agreed on a completion-day stocktake. That stock figure works like a mini adjustment, so budget for a count that comes in higher than the estimate.
Can the acquisition lender fund the top-up?
Sometimes, if the facility was sized with that contingency in mind. More often the top-up is met from the buyer's working capital limit, cash reserves or a separate property-secured facility arranged before completion. Raise it with your lender during structuring, not after the completion accounts land.
What is a locked box, and does it avoid the adjustment?
A locked box fixes the price using a balance sheet at an agreed date before signing, with no true-up afterwards. Instead, the seller promises not to take value out of the business (called 'leakage') between that date and completion. It gives certainty on price but puts more weight on due diligence of that earlier balance sheet.