What is a working-capital target in a business sale?

A working-capital target in a business sale is an agreed amount the transaction expects the business to deliver under a defined measurement. The price-adjustment record compares the closing amount with that target. Start with the definition of the included accounts, not a generic balance-sheet total.

The ABA's working-capital discussion explains the target-versus-closing comparison and the importance of consistent measurement. The particular items, dates and payment mechanism depend on the supplied agreement.

Read the defined accounts

Consider a wholly fictional asset sale closing February 1, 2027. Its base price is $500,000. The supplied agreement sets a $75,000 working-capital target, measured using eligible net trade receivables, eligible inventory and included prepayments, less trade payables and accrued payroll. Cash, interest-bearing debt, tax balances and transaction costs are excluded from this definition and settled separately. No other account enters this particular adjustment.

The parties agree the same eligibility and valuation rules for the target and the closing measurement. “Net receivables” already includes the agreed deductions; inventory already excludes the specified unusable items. Do not subtract those amounts again after using the net figures.

The final closing record supplies $30,000 eligible net receivables, $60,000 eligible inventory and $4,000 included prepayments. Trade payables are $18,000 and accrued payroll $7,000. The measured amount is $69,000: $30,000 plus $60,000 plus $4,000, less $18,000 and $7,000.

Company cash of $15,000 and interest-bearing debt of $20,000 appear elsewhere in the transaction records. Adding the cash or subtracting that debt inside this working-capital measure would violate its supplied definition. They have not vanished; they belong to their separate settlement.

Compare the final number with the target

The final $69,000 is $6,000 below the agreed $75,000. Under this example's expressly symmetric dollar-for-dollar adjustment, the final adjusted price is $494,000: $500,000 less $6,000. If the closing measurement had instead been $79,000 on the same basis, it would be $4,000 above target and yield $504,000.

Those are calculations under invented terms, not a universal legal adjustment rule or evidence that either target is commercially appropriate. A seller and buyer still need to understand which operating period and needs the target is meant to represent.

True up only the remaining difference

The February 1 provisional measurement was $70,000, so $5,000 had already been deducted from the $500,000 base price. The buyer paid the resulting $495,000 then. The final $69,000 measurement is confirmed February 20. Under the supplied payment terms, the seller returns only another $1,000, bringing total price payments to the final $494,000.

Subtracting the full $6,000 again from the provisional $495,000 would produce $489,000. It would apply the initial $5,000 deduction twice. Keep the base price, provisional adjustment and final remaining payment on separate lines.

This is the complete working-capital price-adjustment record. It is not a closing-proceeds forecast: financing, fees, excluded cash and debt settlements and taxes remain outside it. The separate closing-cash guide follows those other claims.

Check the measurement before arguing about the total

1. Identify exactly which accounts and balances the agreed measure includes.
2. Apply the same eligibility, valuation and timing rules to the target and closing record.
3. Reconcile credits, inventory exclusions and accruals once, keeping supporting records.
4. Compare the final measure with the target under the actual adjustment terms.
5. Subtract any provisional adjustment already settled before calculating the remaining true-up.

A receivable included in the agreed amount is still not proof of its eventual collection. An agreed inventory value does not supply an immediate buyer. The working-capital calendar asks whether the operation can fund its bills. This transaction measure asks what defined balance the deal has delivered; the two should not be substituted for each other.

Keep a quoted operating value and the eventual seller receipt separate too. The enterprise-versus-equity guide identifies a different bridge that explicitly excludes this adjustment. Clear names prevent one balance from being used in both without explanation.