You and your co-founders have agreed on a purchase price. In reality, the purchase agreement says that number is “subject to adjustment,” and the working capital adjustment is usually the one that moves it most.

Weeks after closing, the buyer’s accountants recalculate your balance sheet, claim a shortfall, and pull money back out of escrow after you’ve stopped running the company. As a startup lawyer and two-time software founder, I want you to understand this clause before you sign the letter of intent (LOI). Here is how it works and what to negotiate.

What is a Working Capital Adjustment?

A working capital adjustment is a clause in the purchase agreement that trues up the purchase price after closing based on the company’s short-term assets and liabilities. The starting definition comes from accounting: the Securities and Exchange Commission’s guide to financial statements defines working capital as current assets minus current liabilities, meaning the money left if the company paid every debt due within a year out of its short-term assets.

Deal working capital is narrower. Private company sales are commonly priced “cash-free, debt-free”: you keep the cash and pay off the debt at closing, so both are pulled out of the calculation and handled separately. Three terms do the work:

• ●The peg (or target): the normal level of working capital the buyer expects to receive, fixed as a dollar figure in the purchase agreement.
• ●Closing working capital: the actual figure on the closing date, first estimated by you and later recalculated by the buyer.
• ●The adjustment: the difference between the two, added to or subtracted from the purchase price.

The purpose is fairness in both directions. The buyer is protected if you drain receivables or stop paying vendors before closing, and you get credit if you run the business well between signing and closing.

How the Adjustment Changes Your Purchase Price

The math is simple once the peg is set. Assume a $20 million headline purchase price and a $1.5 million peg, before the separate cash, debt, and transaction expense adjustments:

Notice that the $300,000 swing has nothing to do with valuation. Nobody renegotiated your multiple; the clause did the work, months after you thought the purchase price was settled.

My line on deal terms is that the purchase price is the number they show you, and the terms are where the money quietly leaks. Working capital is one of the clearest examples I know.

What Counts as Working Capital in a SaaS Deal

The definition is negotiated line by line, so read the schedule that lists the included accounts instead of relying on the word “working capital.” Here is where the common balance sheet items tend to land:

The accounting rules matter as much as the list. If the agreement lets the buyer apply new reserve policies or a different revenue recognition method after closing, the same balance sheet produces a lower number.

Why Deferred Revenue is the Biggest SaaS Fight

Deferred revenue is cash a customer paid you for services you haven’t delivered yet, so it usually sits on the balance sheet as a current liability. For subscription businesses that bill annually up front, the balance swings hard through the year.

Here is an illustrative example of how that swing hits the purchase price:

1. 1Your company bills almost every annual contract in January, and customers pay those invoices in January.
2. 2Deferred revenue peaks at $2.4 million at the end of January and runs down by $200,000 a month to $200,000 at the end of December.
3. 3Your other working capital items net to a steady $900,000.
4. 4The buyer proposes a peg using the twelve-month average: $1.3 million of average deferred revenue gives a peg of minus $400,000.
5. 5You close at the end of February, when deferred revenue is $2.2 million, so closing working capital is minus $1.3 million.
6. 6The result is a $900,000 shortfall and a $900,000 reduction in your purchase price, even though the business performed exactly as planned.

The buyer’s side has a real point. In a cash-free deal, you keep the January cash, and the buyer still has to service those contracts for the rest of the year, so it wants to be paid for delivering service you were already paid for.

The fight is over how much. Your options as the seller:

• ●Match the peg to the calendar: measure the peg against the same closing month in prior years, so the seasonal swing cancels out.
• ●Pull deferred revenue out of working capital: negotiate it as a separate purchase price item, ideally limited to the buyer’s cost to deliver the remaining service instead of the full billed amount.
• ●Keep it in, consistently: if it stays in, the peg and the closing number must use the same definition, the same months, and the same accounting policies.

How the Closing Statement Process Works

Every working capital adjustment runs through a sequence of deadlines written into the purchase agreement. Miss one on your side and you may lose the right to object.

1Estimated Closing Statement Before Closing

A few days before closing, you deliver your good-faith estimate of closing working capital. The purchase price paid at closing is based on that estimate, so a well-supported estimate keeps the later true-up small.

2Payment at Closing and the Adjustment Escrow

The buyer pays the estimated purchase price, but part of it is often held back in an adjustment escrow. That holdback is held in escrow until the final number is agreed, then released or paid to the buyer.

3Buyer’s Final Closing Statement

After closing, the buyer prepares its own calculation of closing working capital within a deadline set by the agreement. In the Delaware case discussed below, the buyer had 90 days, which it extended.

4Your Review Period and Notice of Disagreement

You then get a fixed review period to object in writing, line by line, with dollar amounts. Anything you don’t object to on time usually becomes final.

5Independent Accountant for What Remains

Items still in dispute go to an independent accounting firm, which decides them on written submissions as an expert with a narrow brief. In the Delaware case, the agreement gave the accountant 30 days and asked for a brief written decision.

6Final Payment and Escrow Release

Once the number is final, whoever owes the difference pays it, typically out of the adjustment escrow first. The agreement should say whether the buyer can reach your other proceeds if the escrow falls short.

Where Delaware Law Limits the Adjustment

A key Delaware decision on this clause is a cautionary tale for buyers who try to stretch it. In Chicago Bridge and Iron v. Westinghouse, decided by the Delaware Supreme Court in 2017, the facts were extreme:

• ●Chicago Bridge and Iron sold a nuclear construction subsidiary to Westinghouse for a closing purchase price of zero, with a net working capital target of $1.174 billion.
• ●The seller’s representations and warranties did not survive closing, so the buyer had given up post-closing claims for breach of them.
• ●After closing, the buyer calculated net working capital at negative $976.5 million, more than $2 billion below the target, largely by attacking the seller’s historical accounting.

The Delaware Supreme Court reversed the lower Court of Chancery and held that the true-up exists to capture changes in the business between signing and closing, measured the same way the seller had always kept its books. The buyer could not use it to relitigate whether the seller’s historical financial statements complied with generally accepted accounting principles (GAAP), a claim it had already given up.

For your own deal, the lesson is to write that limit into the contract instead of hoping a court reads it in. Three drafting points follow from the case:

1. 1Require that closing working capital be calculated using the same principles, practices, and policies as the peg and your historical financials.
2. 2Limit the independent accountant to the disputed line items and to those agreed principles.
3. 3State that the adjustment cannot be used to bring claims that belong under the representations and warranties.

Why the Peg Belongs in the LOI

In my video on letters of intent, I put it this way: the terms in that one document “lock in 90% of how the rest of the deal plays out.” Working capital is a good example, because a buyer who leaves the peg blank in the LOI gets to propose it later, when you’re already committed and tired.

You won’t have every number at the LOI stage, but you can lock the method. Ask for LOI language that covers:

• ●the dollar peg, or the exact method and months used to calculate it;
• ●confirmation that the deal is cash-free, debt-free, and what counts as debt;
• ●how deferred revenue will be treated;
• ●a statement that the adjustment is two-way, so it can increase the purchase price too.

If you’re deciding whether to bring in counsel this early, my guide to hiring a lawyer to sell your business covers the timing.

How to Negotiate the Working Capital Adjustment as a Seller

How I solve this: I build the seller’s own working capital model from monthly balance sheets before the buyer’s accountants get to frame the conversation, then I negotiate each term below against that model.

Two of these carry most of the weight in practice: the accounting principles and the sole-recourse escrow. Get those right, and a dispute is far more likely to stay a disagreement about a few line items instead of turning into a second negotiation of your purchase price.

How the Adjustment Differs From an Earnout and Indemnification

Many founders blur these three because each one can move money after closing. They protect different things:

The indemnification column is where your representations and warranties come in, and the no-double-recovery term above keeps the same item from being charged under both.

How the Adjustment is Taxed After Closing

A working capital adjustment changes the money you receive, so it changes your tax result. How it shows up depends on the deal structure:

• ●Stock sale: under Section 1001 of the Internal Revenue Code, your gain is the amount realized minus your adjusted basis, and the amount realized includes the money you receive. An adjustment paid to you, or returned to the buyer, changes the amount realized on your shares and so the gain on the sale.
• ●Asset sale: Section 1060 requires the purchase price to be allocated across asset classes, and a written allocation agreement between buyer and seller binds both sides unless the Internal Revenue Service (IRS) finds it inappropriate. When the adjustment changes the consideration, the IRS instructions for Form 8594 require whichever side is affected to spread the change across the asset classes and file a supplemental statement for each year a change occurs.
• ●C corporation asset sale: the adjustment flows through tax at the corporate level first and then again on your personal return when the proceeds are distributed to stockholders.

The structure choice drives all of this, which is why I cover it in my comparison of a stock purchase or asset purchase. I’m not a certified public accountant (CPA), so confirm the timing and reporting with your own tax advisor; I’m happy to introduce you to one.

Frequently Asked Questions

Short answers to common questions about this clause.

Conclusion

The working capital adjustment looks like accounting, but it decides how much of your headline purchase price you actually keep. Set the peg and the method early, keep the true-up narrow and consistent with how you’ve always kept your books, and cap your exposure in a separate escrow. If an LOI or a draft purchase agreement is on your desk, that’s the moment to look at this clause.