A Working Capital Dispute That Ate Into a Sale Price

The situation

Tharshini had built her insurance adjusting practice over fifteen years, and it had grown into something more than a one-person operation. Alongside the claims work, her incorporated business stocked and rented out water-damage mitigation equipment — dehumidifiers, moisture meters, air movers, and tarps — to contractors and smaller adjusting firms around Etobicoke who needed gear on short notice after a burst pipe or a storm. That equipment inventory was a real, physical asset on her balance sheet, worth roughly $200,000 at any given time, and it made her practice more valuable to a buyer than a pure service business would have been.

When Tharshini decided to sell, she found a buyer in Pratheep, a real estate agent looking to diversify into property services and drawn to the recurring rental income the equipment side generated. The deal was structured as a purchase of Tharshini's shares in her corporation rather than a purchase of individual assets, which is common when a seller wants to preserve access to the lifetime capital gains exemption available under the Income Tax Act for qualifying small business shares. The agreed enterprise value for the business sat within the $750,000–$2,000,000 range typical for an established practice with equipment assets attached.

Our team drafted the share purchase agreement, and like almost every deal of this size, it included a working capital adjustment. Working capital is current assets — cash, receivables, inventory — minus current liabilities, like unpaid bills. Buyers price a business assuming it will arrive at closing with a normal, sustainable level of working capital, not one that has been artificially stripped out or inflated beforehand. The agreement set a target figure, called a peg, based on Tharshini's trailing twelve months of financial statements, and built in a post-closing true-up: if the actual working capital at closing came in below the peg, the shortfall would be deducted from a holdback of the purchase price that Pratheep's side had withheld specifically for this purpose.

The problem

Sixty days after closing, as the agreement required, Pratheep's accountant delivered a closing balance sheet along with a physical count of the equipment inventory. It showed a working capital shortfall of about $45,000 against the peg, almost entirely attributed to the inventory line. The count reported significantly fewer usable units of drying equipment than Tharshini's own year-end records had shown, and it wrote several older units down to zero value on the basis that they were, in the buyer's accountant's words, obsolete.

Tharshini was confident her equipment count was accurate as of the sale. She had done a count herself in the weeks before closing and had records of every rental and return. But the purchase agreement's working capital mechanism gave Pratheep's side the first word: they were entitled to prepare the closing statement, and Tharshini's role was to review it and object within a set window if she disagreed. If she did nothing, the $45,000 would simply come off the holdback and reduce what she received for the business.

The dispute exposed a gap that is easy to miss when a deal is moving quickly toward closing: the agreement said working capital would be trued up based on a physical inventory count, but it never spelled out exactly how that count would be conducted, who could be present for it, what counted as obsolete versus merely older equipment, or what evidence either side needed to support a valuation. Without those details fixed in advance, the buyer's accountant had wide discretion to apply judgment calls that all landed in the buyer's favour — and Tharshini had no contractual footing to simply reject the numbers outright.

What we did

1. Reviewed the closing statement against the agreement's actual wording. The purchase agreement did require Pratheep's accountant to give reasonable notice of the count and a reasonable opportunity for Tharshini or her representative to observe it. That notice had gone to an old email address and had gone unanswered — a procedural gap that mattered, because it meant the count Tharshini was now being asked to accept had happened without anyone on her side present.
2. Delivered a formal notice of objection inside the deadline. The agreement gave Tharshini a limited window to dispute the closing statement, and missing it would have meant accepting the $45,000 deduction by default. We filed a detailed objection setting out both the procedural defect in the count and the substantive disagreement over which units were properly written off as obsolete, supported by Tharshini's own rental and maintenance records.
3. Invoked the agreement's independent accountant mechanism. Well-drafted working capital clauses anticipate that the parties will disagree, and this one did: unresolved disputes went to a mutually agreed, independent accounting firm whose recalculation would be binding on both sides. This avoided a lawsuit over what was, at its core, an accounting disagreement rather than a legal one — litigation would have cost more than the amount in dispute and taken far longer to resolve.
4. Prepared the evidentiary submission for the independent accountant. We worked with Tharshini to assemble her pre-closing inventory count, rental logs showing which units were actively generating income in the months before the sale, and manufacturer guidance on typical equipment lifespan, to counter the buyer's blanket obsolescence write-down.
5. Negotiated the release of the undisputed portion of the holdback. While the inventory dispute worked through the independent review process, we secured Pratheep's agreement to release the roughly $60,000 portion of the holdback that neither side contested, so Tharshini was not left waiting on her full payment over a disagreement confined to one line item.

The outcome

The independent accountant's recalculation split the difference, but not evenly. It agreed that several units Tharshini had counted as usable were, on closer inspection of their maintenance records, genuinely past reliable service life and fairly written down — that part of the buyer's position held up. But it also found that the count itself had undercounted units that were simply out on active rental at the time, which the buyer's accountant had mistakenly treated as missing rather than deployed. The final adjustment came to roughly $28,000 against the original $45,000 claim, a reduction of about $17,000 from what Pratheep's side had first deducted.

Tharshini received the bulk of her holdback, but she did not walk away untouched. The $28,000 shortfall was real money, and it represented equipment she had genuinely allowed to age past a reasonable service life without writing it down on her own books along the way. The dispute took close to four months from the delivery of the closing statement to final resolution — well within the bounds the agreement's independent-accountant process allowed, but still four months longer than a clean closing would have taken, and four months of professional fees on both sides that a tighter agreement could have avoided.

The lesson for Tharshini, and for any seller with a physical inventory of equipment or stock, is not that working capital adjustments are unfair. They exist for a good reason: they stop a seller from quietly running down inventory or collecting receivables early in the months before a sale to inflate the headline price. The lesson is that the mechanism is only as fair as its procedural detail. A clause that says the parties will conduct a physical count without saying who attends, how disputes over condition or obsolescence get resolved, and what documentation each side must produce, hands the advantage to whoever prepares the closing statement first — which, in most deals, is the buyer.

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