Working capital is one of the last things most business owners think about when they begin a sale process, and one of the first things a buyer's diligence team focuses on. The gap between those two positions accounts for a significant share of post-heads-of-terms price reductions in lower-mid-market deals. How working capital is analysed in diligence, and which adjustment points recur most often, is a direct input to the price a seller receives on completion.
What working capital actually means in a deal context
In everyday operations, working capital is the difference between current assets and current liabilities: trade debtors, stock and prepayments on one side; trade creditors, accruals and deferred income on the other. In a deal context, the concept is narrower and more specific. The buyer and seller agree a normalised working capital figure, which represents the amount of working capital the business needs to operate at its current trading level without additional funding. That normalised figure becomes the target embedded in the sale and purchase agreement.
Completion accounts then measure actual working capital at closing. If actual working capital falls below the target, the seller pays the buyer the difference; if it exceeds the target, the buyer pays the seller. The mechanism exists to protect the buyer against a seller who runs down debtors, defers supplier payments or inflates stock in the weeks before completion.
The adjustments that generate most of the disputes
Normalisation is where the complexity concentrates. A buyer's diligence team will reconstruct the working capital over a trailing period, typically twelve to twenty-four months, to identify items that inflate or deflate the apparent figure. Several categories recur consistently.
- Seasonality: A business that invoices heavily in December will show elevated debtors at a December year-end. A buyer that uses a single balance sheet date as the working capital target is pricing in a number the business will not sustain in an average month. Sellers who understand this argument can anchor on an average-of-twelve-months calculation; buyers will push for a figure that reflects the low point of the seasonal cycle.
- One-off receipts and payments: A large prepayment received just before the reference date, or an unusually extended creditor payment around year-end, distorts the normalised figure. Diligence teams look for these specifically and strip them out.
- Deferred income classification: Software, subscription and services businesses often carry deferred income as a working capital liability. Buyers argue it represents revenue not yet earned; sellers argue it represents contracted future work with low incremental cost. How it is treated can move the normalised working capital figure materially, particularly in SaaS-adjacent models.
- Intercompany balances: In owner-managed businesses, balances between the trading entity and a holding company or property company are frequently excluded from the working capital calculation entirely. If those balances are not clearly separated before diligence begins, the buyer will seek to exclude them from the completion accounts mechanism in a way that disadvantages the seller.
- Stock provisioning: Buyers apply conservative provisioning policies to slow-moving or aged stock. A seller that has not taken write-downs consistent with those policies will see a normalised stock figure lower than the book value, which reduces working capital and, consequently, the price.
How to prepare before diligence begins
The most effective working capital preparation happens six to twelve months before a transaction is anticipated, not six weeks before heads of terms are signed. At that stage, a seller can reconstruct the trailing working capital to understand what a buyer's team will find, identify which items will attract adjustment arguments, and resolve accounting ambiguities before they become negotiation points under time pressure.
Practical steps include: commissioning a working capital analysis that mirrors the methodology a buyer's accountants will apply; reviewing stock provisioning policy and aligning it with a defensible commercial position; separating intercompany balances cleanly in the management accounts; and producing a monthly working capital schedule that supports a normalisation argument based on averages rather than a single balance sheet date.
Where sellers lose value without realising it
The most common failure mode is sellers accepting a working capital target without fully understanding how the normalisation was constructed. A target set by reference to an unusually high debtor balance, atypical creditor timing, or a deferred income classification that does not match the business's economic reality will produce a figure the seller cannot sustain in the ordinary course. The completion accounts adjustment then flows directly from the seller to the buyer.
A second failure mode is timing. Sellers who focus on EBITDA and valuation multiples, and treat working capital as an administrative close-out matter, often do not engage their advisers on the completion accounts mechanism until the SPA is near final. By that point the target has been set and the mechanism is largely agreed; the room to negotiate methodology is gone.
A third pattern is the owner-manager's direct financial relationship with the company: director loans, personal expenses routed through the accounts, or creditors held beyond normal terms as a matter of personal preference. Buyers will identify these and adjust for them. Sellers who surface them proactively retain credibility and avoid the appearance of managing the balance sheet ahead of completion.
The role of independent advice
Sellers who engage their own advisers to review the buyer's working capital analysis, rather than accepting the buyer's numbers on trust, achieve better outcomes at completion accounts. The methodology question (which items to include, which period to average over, how to treat deferred income or intercompany balances) is genuinely open to interpretation, and the first version of the analysis is almost always framed in the buyer's favour. Challenging the methodology at heads-of-terms stage, before the SPA locks in the mechanism, is where the value is protected.
If you are preparing for a sale and want an independent view on how your working capital will be assessed in diligence, or are already in a process and want a review of the buyer's normalisation methodology, book a consultation with the Blash Advisory team.
