A buyer who closed on a landscaping company in California wrote on Searchfunder about his first four and a half months. One of his clearest pieces of advice was about the working capital true-up: plan for it to take real time. He reviewed every bill and expense from the prior 90 days twice, worked through every invoice by when the work was actually done, and went job by job through work in progress before he could rerun the number.
That experience is common. The true-up is one of the most underestimated pieces of work in a small acquisition.
What the true-up is
At closing, the price is based on an estimate of net working capital. The purchase agreement sets a period, often 90 days, for the buyer to calculate the actual figure on the closing date. If it is below the agreed peg, the seller owes the difference. If it is above, the buyer pays it. The seller then has a period to review and dispute the calculation.
What has to be sorted, line by line
Bills and expenses. Every bill paid after closing has to be checked: does it relate to a period before closing or after? A supplier invoice for materials delivered the week before closing is the seller's liability, even if the buyer paid it.
Accounts receivable. Every invoice is assigned by when the work was done, not when it was billed. Work before closing belongs to the seller, work after to the buyer. If the business bills monthly, the first invoice after closing usually needs splitting.
Work in progress. For each open job at closing, the costs and the billing before and after the date need separating. This is the hardest line for project and construction businesses.
Payroll. The payroll paid in the first cycle after closing often covers days on both sides of it. Accrued wages, payroll taxes and benefits up to the closing date are the seller's.
Bad debts. Receivables that will not be collected should not count as working capital. Old invoices often turn out to be uncollectable once someone actually chases them.
Other accruals. Customer deposits, unbilled expenses, credit card balances and accrued taxes that were never on a cash-basis set of books.
Once every line is sorted, the working capital calculation is rerun on the definition agreed in the purchase agreement.
Why it takes so long
The calculation is not complicated. The records are. Many small businesses run on cash-basis books with no month-end cut-off, so the information needed to split a bill or an invoice by date is not in the ledger. It has to be rebuilt from emails, delivery notes and job files.
And the person doing it is the new owner, in their first quarter, while also running the business.
How to make it shorter
Agree an illustrative calculation before signing. Attach a worked example to the purchase agreement using a recent month end. Most disputes disappear when both sides have already agreed how each line is calculated.
Close the books on the closing date. Treat closing day as a month end. Cut off bills and invoices, count inventory and work in progress, and accrue payroll to the date.
Keep pre-closing and post-closing transactions apart. Code every transaction in the first months by whether it relates to before or after closing, as it is entered, not months later.
Get help early. The person who records the acquisition should usually do the true-up too, because the two depend on each other.
How the result is settled
The adjustment is usually paid in cash, set against an escrow, or applied to a seller note by reducing its principal. Agree which in the purchase agreement. If the parties cannot agree the calculation, most agreements send the disputed items to an independent accountant.
What the true-up will not cover
It adjusts working capital only. Equipment that does not work, undisclosed liabilities and earnings below what was represented are matters for the representations, warranties and any indemnity in the agreement, not the working capital calculation.
Frequently asked questions
What is a working capital true-up?
The calculation, after closing, of a business's actual net working capital on the closing date, compared with the target agreed in the purchase agreement. The purchase price is adjusted up or down for the difference.
How long does a working capital true-up take?
Purchase agreements commonly allow around 90 days, but the work often takes longer than buyers expect, especially when the seller's books were kept on a cash basis without month-end cut-off.
How is a working capital true-up paid?
Usually in cash, from an escrow, or by reducing the principal of a seller note. The purchase agreement should say which.
What happens if the buyer and seller disagree on the true-up?
Most purchase agreements give the seller a period to review and dispute the calculation, and refer unresolved items to an independent accountant whose decision is binding.
Where CFOLogic fits
We close the books on the closing date, keep pre-closing and post-closing transactions apart from day one, and prepare the true-up calculation on the definition in your agreement. That turns a quarter of evenings into a defined piece of work, done once.