Working Capital Adjustment: The Closing-Day Surprise That Costs DFW Sellers Six Figures

The first time I watched a DFW owner take a $230,000 hit on closing day, the wire had already gone out. He scrolled the settlement statement and said two words I still hear in my head. "What's this?"

That was the working capital adjustment. Nobody had explained it to him until that morning.

This is the most expensive single paragraph in your purchase agreement — and the one most $1M to $20M owners never read carefully. Below: what the adjustment is, how the peg gets set, where the leaks happen, and seven LOI terms that protect your wire before you sign.

What Is a Working Capital Adjustment When Selling a Business?

Plain English: when a buyer purchases your company, they need it to keep running the morning after close. That means enough working capital inside the business to make payroll, pay vendors, fund inventory, and collect on customers in the normal course.

So the purchase agreement sets a target — called the peg, the working capital target, or the net working capital reference amount. At closing you compare:

• Deliver less working capital than the peg, and the purchase price drops dollar for dollar. You owe that back.
• Deliver more than the peg, and the surplus gets paid out to you.

Most lower middle market deals do a preliminary adjustment at closing using an estimate, then a final true-up 60 to 90 days after close once the closing balance sheet is finalized. Both numbers are real money. Both can swing six figures.

How the Peg Actually Gets Calculated

In almost every deal, the peg is the trailing 12 month average of your net working capital. The buyer's accountants build a month-by-month NWC snapshot, average the twelve, and that average becomes your target.

Net working capital is current assets minus current liabilities. Sounds simple. It is not. The math lives in the definition — and the definition is negotiated.

Usually included in net working capital for the peg: accounts receivable (net of bad debt reserve), inventory (net of slow-moving reserve), prepaid expenses, accounts payable, accrued payroll/bonuses/vacation/commissions, accrued sales tax and other accrued expenses, customer deposits and deferred revenue, and warranty reserves.

Usually excluded: cash (you keep it, buyer brings their own), all forms of debt (paid off at closing), intercompany and related-party balances, income tax assets and liabilities, and anything classified as an "add-back" in your EBITDA normalization.

Every line item is negotiable. The owners who win this know what is on the table. The ones who don't, hand the buyer the pen.

A Worked Example: What This Looks Like in Real Dollars

Where DFW Sellers Quietly Leak Money

After running through dozens of these in HVAC, plumbing, roofing, manufacturing, and dental, the same six leaks show up over and over.

1. Letting the buyer write the peg unilaterally

The buyer's first draft almost always proposes a peg that benefits the buyer — often the 12 months ending the month of closing, which can include your seasonal high-inventory months (pre-summer for HVAC, pre-winter for heating). Counter with the trailing 12 months ending one month before closing, and negotiate the period if your business is seasonal.

2. AR aging haircuts

Buyers discount your accounts receivable. Anything over 90 days gets a reserve. Anything over 120 days often gets excluded entirely. Sloppy collections cost you twice — once in the AR write-down, again because the buyer assumes future collections will be just as sloppy.

3. Inventory reserves

If you carry parts, materials, or finished goods, the buyer's diligence team looks at how fast each SKU turns. Anything that hasn't moved in 6 months gets a partial reserve. Anything that hasn't moved in 12 months often gets fully reserved. Brutal for older HVAC parts and roofing supplies sitting on the shelf.

4. Accrued expenses you never tracked

Cash-basis books mean you probably don't accrue vacation, bonuses, or sales tax. The buyer will. They calculate the accrual at closing and it becomes a liability inside net working capital. That liability didn't exist in your trailing 12 month average — so it now looks like a shortfall.

5. Customer deposits and deferred revenue

Collect deposits up front — common in HVAC installs, manufacturing, and roofing? Those dollars are a current liability until the work is done. Buyers subtract them. Owners are routinely shocked because the cash already came in months ago.

6. Aggressive collections in the last 90 days

Some sellers try to game it by collecting hard and paying slow in the final quarter before closing. This distorts the trailing 12 month average. Any decent quality of earnings firm catches it, recalculates the peg, and adds a separate adjustment. You will not win this game.

The 7 LOI Terms That Protect Your Wire Amount

By the time you are negotiating a closing statement, the leverage is gone. The fight is in the LOI and purchase agreement. Seven terms every DFW owner — or their M&A advisor — should put on the table before signing:

1. Definition of net working capital, line by line. Spell out exactly which accounts are in, which are out, and how reserves get calculated. Attach a sample calculation as an exhibit.
2. The measurement period. Trailing 12 months ending the month before closing. Negotiate longer or shorter periods if your business is seasonal — the goal is a peg that reflects the real, steady-state operations of the business.
3. Cash is excluded. Always. You keep the cash; the buyer brings the working capital.
4. A peg collar. A small no-adjustment band around the peg (often $25K to $75K either side) so micro-fluctuations don't trigger a true-up.
5. Reserve methodology. Bad debt reserve, inventory reserve, and warranty reserve calculations stated explicitly. Don't let "GAAP" be the only word in that paragraph.
6. Dispute resolution. A defined process if you disagree with the buyer's closing balance sheet — independent accountant, time limits, who pays for the review.
7. Caps on indemnity tied to working capital. The working capital adjustment should be uncapped only on the agreed methodology. Anything else flows through normal indemnification with caps.

Dense list. It is also the difference between $230K vanishing on closing day and a clean, predictable settlement statement.

The DFW Texas Angle

Most DFW trade businesses run lean. Owners pull cash out aggressively, run on cash-basis books, and don't carry big AR or inventory. Tax-efficient — but it makes the working capital negotiation harder, because a tiny peg leaves tiny margins for error.

If you are 12 to 24 months out from selling a Dallas, Fort Worth, Plano, or Frisco business, the move is to stabilize working capital behavior right now. Stop the end-of-quarter cash sweeps. Accrue properly. Clean up old AR. Reserve inventory honestly. Your valuation goes up, your peg becomes predictable, and you stop handing the buyer free leverage.

Pre-LOI Checklist Before You Sign Anything

The Truth Most Sellers Don't Hear Until It's Too Late

Buyers do this every day. They have a CFO, an accounting firm, and a deal lawyer who run working capital adjustments for a living. Most sellers do this once. The asymmetry is enormous.

At Kingdom Broker, the working capital adjustment is one of four conversations we have before taking a business to market — alongside owner dependency, customer concentration, and the CIM. Three are about valuation. This one is about what actually hits your bank account. On a DFW deal at $5M to $15M, the difference is routinely six figures. Sometimes seven.