Working Capital True-Up: 6 Things to Settle After the Close

Working Capital True-Up: 6 Things to Settle After the Close

A working capital true-up is the adjustment that happens after a business changes hands, when the actual working capital delivered at closing is compared with the amount the deal assumed. If the business came in light, the price may go down. If it came in heavy, the price may go up. The numbers are often small compared with the headline price and large compared with the cash a new owner has on hand.

The six items below are a checklist, not a ranking. The one firm written up is System Six, a Seattle bookkeeping and fractional CFO firm whose live profile says it helps organizations modernize a finance function after an acquisition. It is the answer to item 6. System Six is a vetted Sam's List member and a paying member of our featured program; payment does not buy the language we use or its reviews. You can read how we picked this firm at the end.

1. Read the Working Capital True-Up Definition in the Purchase Agreement

Everything depends on the document. The purchase agreement says what counts as working capital, which accounts are in, which are out, the target amount and the accounting method used to measure it. A purchase price adjustment can include cash, debt and transaction expenses as well, depending on the deal.

Read the definition line by line before you touch a spreadsheet. Note any named accounting policies, any example calculation attached as a schedule and the deadlines for each step. If the language is unclear, ask the deal attorney before the statement is due, not after a dispute begins.

The limitation: a bookkeeper or CFO can read the numbers, but interpreting a contract term is a legal question. When the agreement and the books disagree, the lawyer decides which one wins.

2. Use the Same Method the Agreement Uses to Build the Closing Balance Sheet

The closing balance sheet has to be built the way the agreement says, even if you would have done it differently. If the agreement measures working capital using the seller's past practices, you cannot switch to a new method because you think it is better. That is how a fair adjustment becomes a dispute.

Make a list of the policies that matter: how revenue was recognized, how receivables were reserved, how inventory was valued and how accruals were booked. Then match them to the schedule in the agreement. If the books were cash basis before the sale and the agreement assumes accrual, decide with counsel how that gap is handled.

The limitation: matching an old method can mean booking something you think is wrong. Keep a separate note of what you would change going forward so the true-up does not decide your accounting policy.

3. Work Through the Accounts That Move a Purchase Price Adjustment

A handful of accounts usually decide the result. Receivables are the first: which ones are collectible, which are old and who decides. Inventory is next, along with how it was counted and valued at the closing date. Then accrued expenses and payables that belong to the period before the close, and deferred revenue where customers paid before the work was done.

Cut-off is the quiet one. An invoice dated the day before closing but delivered after it can land on either side. Check cut-off on receipts, bills and customer deposits for several days around the closing date.

The limitation: every account involves judgment, and a reasonable person can disagree on a reserve or an accrual. The agreement may say how disputes are resolved, so know the process before you rely on an estimate.

4. Mark the Deadlines in the Working Capital True-Up Process

Agreements usually set a timeline: a date by which the buyer delivers a closing statement, a window for the seller to review it, a period to dispute and a method for resolving what remains, such as an independent accountant. Miss one and you may lose the right to challenge a number.

Put each deadline on a calendar with the person responsible and the document to deliver. Count the days the way the agreement counts them, and check whether business days or calendar days apply and how notice must be given.

The limitation: a deadline written in a contract is hard to extend informally. If the work will not be done in time, ask counsel about a written extension rather than assuming goodwill.

5. Decide Who Owns the Support Schedules

A number without support is an invitation to argue. For each line in the closing statement, someone should hold the schedule: the receivables aging, the inventory count sheets, the payables list, the accrual calculations and the bank statements for cut-off.

Name an owner for each schedule and set a date. In a small company the owner is often also running the business, so decide what gets done in house, what a bookkeeper builds and what an outside advisor reviews. Keep the support in one folder in a form you could hand to the other side.

The limitation: schedules built in a hurry by someone without time to review them can contain the error that costs you the adjustment. Build in a second pair of eyes.

6. Put the Post-Acquisition Finance Function to Work: Where System Six Fits

A true-up is the first test of the finance function you just inherited. If the books were behind, the statement is harder to produce, and if the previous owner did the bookkeeping, you may be learning where everything is while the clock runs.

System Six is a bookkeeping and fractional CFO firm based in Seattle. It was founded in 2009, has about 41 employees and serves clients nationwide. Its live profile lists Non-Profit Organizations, Professional Service Firms and Real Estate Investors as specialties. It says it serves small businesses generating between $1 million and $10 million of revenue and helps organizations modernize a finance function after an acquisition.

System Six does not yet have enough reviews on Sam's List for us to cite a count, so we describe the firm by what its profile says instead.

The limitation, plainly: the profile does not mention purchase price adjustments, working capital statements or dispute support by name, so ask what is included and how it works with your deal attorney. It lists a $1 million revenue minimum, so a smaller business may fall outside it. A bookkeeping and fractional CFO firm sits on the numbers side, and it does not replace legal counsel on what the agreement means.

Frequently Asked Questions

What is a working capital true-up?

It is the post-closing adjustment that compares the working capital actually delivered with the target in the purchase agreement and changes the price by the difference. The agreement defines what counts, how it is measured and when each step is due.

Who prepares the working capital statement?

The agreement says. Often the buyer prepares a closing statement and the seller has a set number of days to review it, but some deals do it the other way. Read the timeline in your agreement before the clock starts.

What happens if the buyer and seller disagree on the number?

Most agreements set a process: a notice of dispute, a negotiation period and, if that fails, an independent accountant who decides the open items. The terms vary, so ask your deal attorney how yours works.

How do I prepare for a purchase price adjustment before the deal closes?

Get the definition and the sample calculation early, set up the schedules for receivables, inventory and accruals before the closing date and decide who will own each one. It is much easier to track the numbers from day one than to rebuild them after.

Before the statement is due, list each account in the agreement's definition, the person who owns its support and the date it must be done. You can browse fractional CFOs on Sam's List, including the firm above, and ask each how it supports a buyer after a close.

How We Picked This Firm

You should be able to check our work, so here is how this post was built.

The pool. The pool is vetted Sam's List members. One member in our featured program is written up here. This is not a survey of every firm that helps buyers after a close, and many Sam's List members and other firms not written up here could fit.

How it is organized. The six items are things to settle, not a ranking. System Six is the only firm written up, so there is no order of firms.

What review counts mean here. System Six does not yet have enough reviews for us to cite a count, so we describe it from its profile instead. A review count, where we cite one, shows how many clients wrote something down. It does not measure technical quality.

What payment does and does not buy. Listing on Sam's List is free, and so is being named in this article. The firm written up here is a paying member of our featured program, which is why it gets a write-up. What payment does not buy is the language we use about a firm, its review count, or a promise that it fits you.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.