Working Capital Adjustment 101

investor profile

January 20, 2022

by an investor from Harvard University - Harvard Business School in Toronto, ON, Canada

All- As aspiring CEOs, some of you may already be familiar with The Working Capital Adjustment, which is part of substantially every M&A transaction. Yet, speaking more broadly, it is the calculation (and concept) with which most small business owners remain largely unfamiliar.

Without a proper understanding of what the working capital adjustment is, why it's necessary, and ways in which it can be manipulated, business owners risk leaving a lot of money on the table when dealing with a more sophisticated and experienced counterpart.

This week's blog post is meant to educate both buyers and sellers of small and medium sized businesses on this very important concept, one that is almost certainly going to present itself within###-###-#### days after the consummation of an M&A transaction. Link to read or listen to the blog post can be found below. 

The Working Capital Adjustment

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commentor profile
Reply by a searcher
from Texas A&M University in Dallas, TX, USA
Thanks a ton for this, this topic was actually on a list of questions that I had regarding the actual transfer. Quick question - in the post there was an example of a 5 million revenue business with an outstanding single order of 2 million... Would this not be something where in that case (I mean, with a transaction that large relative to average yearly revenue) it would be directly negotiated (as in WHO gets the 2 mil?) rather than something that would tried to be "smoothed over" in some kind of 120 day Working Capital calculation?
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Reply by a searcher
from University of Pennsylvania in Philadelphia, PA, USA
Steve - Great writeup. Really appreciate you sharing.

How would you think about treating WIP? This could be something in process of being built in the case of a manufacturing company, or being fulfilled in the case of a distribution company (most relevant where there are long lead times on orders). Have had this come up a few times. Just treat as another part of working capital?
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