A Working Capital True-Up is a post-close adjustment to the purchase price based on the variance between delivered NWC and an agreed target. It's the M&A mechanic that quietly costs sellers six- to seven-figure sums when poorly negotiated.
How it works
Both parties agree to an NWC target at the LOI stage — usually trailing 12-month average NWC, sometimes seasonality-adjusted. At close, accountants measure delivered NWC. The variance settles as a price adjustment:
- Delivered NWC above target → buyer pays seller the excess
- Delivered NWC below target → seller pays buyer the shortfall
Why seasonality matters
A brand with summer peak has different NWC in March (inventory build) vs October (post-peak, drawn down). If the target is set ignoring seasonality and you close in March, the buyer pays a windfall (your inventory is high). If you close in October, you pay the buyer. Always negotiate the target reflecting close timing.
Example
Trailing 12-month average NWC: $1.8M. You close in March; actual NWC is $2.3M (inventory build for summer). Buyer owes you $500K true-up — but only if the target wasn't seasonality-adjusted. If the seasonality-adjusted March target was $2.4M, you owe $100K. Same business, different document.
The most common mistake
Setting an annual-average NWC target when closing in a non-average month. Sellers routinely lose $200K-$1M+ on this. The fix: insist on a target that reflects the actual close month or close-month range.
Frequently Asked Questions
How does WC true-up work?
Post-close adjustment to purchase price for variance from NWC target.
Why is target tricky?
Seasonality. Target must reflect close timing.
How do sellers protect themselves?
Negotiate target with seasonality math, manage NWC pre-close, push for a collar.
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