- In a business sale, working capital is generally the difference between a business's current assets (cash, accounts receivable, inventory, prepaid expenses) and its current liabilities…
- Buyer and seller typically agree on a target working capital amount (often called the "peg") before closing, based on the business's recent historical average.
- Purchase agreements commonly handle this adjustment in two stages rather than trying to get an exact figure the moment the deal closes: 1.
Most Ontario business purchase agreements do not lock in a single, final price on signing day. Instead, the headline number is adjusted — usually up or down by a modest amount — based on how much working capital is actually sitting in the business when the deal closes. If you have ever wondered why the amount that shows up in your bank account weeks after closing differs from the number on the front page of the agreement, this is almost always why.
The working capital adjustment exists because a business is a living thing. Inventory gets sold, receivables get collected, bills get paid, all while the deal is being negotiated. A price set months earlier, based on old financial statements, would otherwise hand one side a windfall and the other side a loss purely because of timing.
This article walks through what working capital means in a sale context, how the adjustment mechanism typically works, and what to watch for whether you are buying or selling.
What "Working Capital" Means Here
In a business sale, working capital is generally the difference between a business's current assets (cash, accounts receivable, inventory, prepaid expenses) and its current liabilities (accounts payable, accrued expenses, short-term debt). The purchase agreement will define exactly which line items count — this definition is negotiated, not standardized, so read it carefully rather than assuming it matches a textbook formula.
Why a "Peg" Gets Set
Buyer and seller typically agree on a target working capital amount (often called the "peg") before closing, based on the business's recent historical average. The idea is simple: the buyer should receive a business with roughly the same amount of working capital it has been operating with, not a business that has been stripped of cash and inventory right before handover, and not one artificially loaded up with debt.
- If working capital on closing day comes in above the peg, the seller is usually paid more.
- If it comes in below the peg, the buyer usually pays less, or the seller pays back the shortfall.
The Two-Step Adjustment Process
Purchase agreements commonly handle this adjustment in two stages rather than trying to get an exact figure the moment the deal closes:
- Estimated closing statement. Shortly before closing, the seller (sometimes with the buyer's input) prepares an estimate of working capital as of the closing date. The purchase price paid at closing is adjusted based on this estimate.
- Final closing statement. After closing — once the books can be properly reconciled — a final statement is prepared. If it differs from the estimate, a true-up payment flows between the parties to settle the difference.
This two-step approach lets the deal close on schedule without waiting for perfect numbers, while still protecting both sides against a materially wrong estimate.
What's Typically Included and Excluded
The categories below are commonly discussed in a working capital adjustment, but every agreement defines its own list — never assume a category is included or excluded without checking your specific agreement.
| Often included | Often excluded or separately treated |
|---|---|
| Accounts receivable (net of an allowance) | Cash, unless the deal is structured cash-free/debt-free |
| Inventory | Long-term debt |
| Prepaid expenses | Intercompany balances |
| Accounts payable | Owner-related liabilities not assumed by the buyer |
| Accrued liabilities (wages, taxes owing) | Non-operating or one-time items |
Many Ontario deals are structured on a "cash-free, debt-free" basis — meaning the seller keeps the cash and pays off outstanding debt before closing, and working capital is calculated on the operating accounts only. If your deal is structured this way, confirm exactly where the line falls.
Getting the Peg Right Before You Sign
A few practical points worth raising with your lawyer and accountant while the purchase agreement is still being negotiated:
- Ask how the target peg was calculated, and over what historical period — a peg based on an unusually strong or weak season can distort the outcome.
- Confirm which accounting policies apply (for example, how inventory is valued, or when a receivable is considered collectible) — inconsistent policies between the estimated and final statements are a common source of disagreement.
- Decide in advance who prepares the final closing statement, and on what timeline, so there is no ambiguity after closing when incentives to disagree are highest.
When the Numbers Don't Match
Disagreements over the final closing statement are common enough that most purchase agreements build in a resolution mechanism — often a review period for the other side, followed by referral to an independent accountant if the parties cannot agree. If you find yourself disputing a post-closing adjustment, that process (and the agreement's own wording) governs how the disagreement gets resolved.
Frequently asked questions
Does a working capital adjustment apply to every business sale?
Not automatically — it depends on whether the purchase agreement includes one. Working capital adjustments are common in asset and share deals of an operating business, but a straightforward asset purchase involving only specific, identified assets may not include one at all.
Who decides what counts as a "current" asset or liability?
The purchase agreement does, in its own definitions section. There is no single legal standard that applies automatically — the parties negotiate and define the terms themselves, usually with accountants involved on both sides.
Can the adjustment go against the seller after closing?
Yes. If the final closing statement shows working capital below the agreed peg, the seller is typically the one who owes money back to the buyer, even though closing has already happened.
How is the adjustment actually paid?
Typically through a direct payment between the parties once the final statement is agreed or determined, sometimes drawn from an escrow or holdback set aside at closing specifically for this purpose.
This is a business purchase or sale question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.