Working capital trues at closing routinely move 1 to 5 percent of headline price. On a $30M deal that's $300K to $1.5M of cash that crosses sides 60-90 days post-close. Most of that movement is determined by how the working capital methodology was pinned (or wasn't) in the LOI.

This post walks the math on a $30M deal, the methodology that protects sellers, the buyer-favorable language to redline, and how the calculation actually runs from LOI to close to true-up.

The TL;DR

• Working capital trues move 1 to 5 percent of price on most LMM deals
• Buyer-drafted LOIs use vague language ("customary working capital adjustment") that defaults to buyer-favorable methodology
• The seller's protection is to pin the methodology in the LOI itself, not defer to definitives
• Key levers: TTM averaging period, cost allocation methodology, exclusion definitions, audit rights, dispute resolution mechanic
• Sellers who pin all five levers in the LOI capture 60-80 percent of working capital trues that would otherwise leak to the buyer

What the working capital adjustment is

In most LMM deals, the purchase price assumes the business will be delivered with a "normal" level of working capital. Working capital here means current assets (excluding cash) minus current liabilities (excluding debt). The buyer needs operating capital to run the business; the seller has been operating it.

The adjustment ensures the buyer gets the agreed-upon amount of operating capital. If the seller delivers more, the buyer pays the seller the excess. If the seller delivers less, the seller pays the buyer the shortfall.

In theory, this is fair. In practice, the buyer drafts the methodology and the buyer-favorable methodology costs the seller money.

The math on a $30M deal

Take a typical LMM deal: $30M headline price, normalized EBITDA $4M, business operates with average working capital around $3M.

Buyer-favorable methodology: aggressive interpretations of "current liabilities" (e.g., classifying tax accruals or deferred revenue as current), generous interpretations of "current assets" thresholds (e.g., requiring more receivables collection before counting them), 30-day averaging period instead of 12-month TTM.

The result: the calculated closing working capital is artificially low. The seller "delivered short" and pays the buyer the gap. Practitioner observation: this gap is typically $300K to $1.5M on a $30M deal — 1 to 5 percent of price.

Seller-favorable methodology: TTM 12-month averaging period, fixed exclusions (cash and debt out, tax accruals reclassified as long-term), audit rights for the seller, neutral accountant for disputes.

Same business, same closing date, very different working capital number. The methodology choice can swing the closing transfer by $1M+.

The five levers

The working capital methodology has five levers. The buyer's draft will pull each toward buyer-favorable. The seller's redline pulls each toward seller-favorable.

Lever 1: averaging period

How is the working capital target set? Common methodologies:

• TTM 12-month average: seller-favorable, smooths seasonal variation
• 6-month average: intermediate
• 30-day or 60-day average ending at close: buyer-favorable, captures the latest snapshot

For most LMM businesses, TTM 12-month is the right protection. Seasonal businesses (retail, agriculture) need TTM to avoid being penalized for a low season at closing.

Redline language: "Working capital target shall be the trailing 12-month average of monthly working capital balances, calculated per Schedule 4.2."

Lever 2: cost allocation methodology

Working capital includes accruals: accrued payroll, accrued benefits, accrued vacation, accrued bonuses. The buyer's methodology may classify all of these as current liabilities (which reduces working capital and creates a closing transfer to the buyer). The seller's methodology may exclude some.

Redline language: Pin the specific accrual line items that count as current liabilities. Exclude items the seller has historically funded outside operating capital (founder bonus accruals, non-recurring tax accruals).

Lever 3: exclusion definitions

What's "out" of the calculation:

• Cash and cash equivalents (always out)
• Debt and debt-like items (always out, but the definition of "debt-like" matters)
• Inter-company balances (typically out for stock deals)
• Deferred revenue (treatment varies; can swing the calculation by hundreds of thousands)
• Capitalized leases and lease liabilities (treatment varies)

Redline language: "Working capital excludes cash, debt, debt-like items, deferred revenue, capitalized lease liabilities, and inter-company balances. 'Debt-like items' is defined per attached Schedule 4.3."

Lever 4: audit rights

Who calculates the closing working capital? The buyer's accountants. Does the seller have audit access?

Buyer-favorable: seller has limited or no audit right, must accept the buyer's calculation.

Seller-favorable: seller has 30-day audit right, full access to working papers, ability to reconcile to seller's records.

Without audit rights, the seller has no way to challenge a buyer-favorable calculation. With audit rights, the seller can identify and dispute methodology errors.

Redline language: "Seller has 30-day audit right on the working capital calculation. Buyer shall provide complete working papers and reconciliations within 5 business days of seller's request."

Lever 5: dispute resolution

If the seller disputes the calculation, how does it get resolved?

Buyer-favorable: disputes resolved by buyer's auditor (whose fees the buyer pays).

Seller-favorable: disputes resolved by neutral accountant (third-party), with shared fees and binding determination.

Redline language: "Disputes resolved by [named neutral accounting firm] within 30 days. Determination is binding. Fees shared 50/50 between buyer and seller."

How the calculation runs from LOI to close

A clean working capital process:

At LOI: Working capital target is set per the methodology pinned in the LOI itself (with attached schedule). Estimated working capital target is provided based on TTM data.

Pre-closing: Seller's team prepares working capital schedules monthly, reconciled to the agreed methodology.

At closing: Estimated closing working capital is calculated. If above target, buyer pays seller the difference. If below target, seller pays buyer the difference. This is the "estimated" close adjustment.

60-90 days post-close: Final closing balance sheet is calculated. The "true-up" adjusts for any difference between estimated and final. This is where 1-5 percent of price moves.

Audit period (30 days): Seller has audit access. Disputes go to neutral accountant per the dispute mechanic.

A clean process closes the working capital chapter cleanly. A loose process drags into months of post-close disputes.

What the LOI should include (specifically)

A protective LOI for working capital includes:

Schedule 4.2 (the working capital methodology schedule) is where the specifics live. It's the document the seller's CFO and the buyer's accountants will reference for every calculation post-LOI.

Common pitfalls

Pitfall 1: deferred revenue

Treatment of deferred revenue is a frequent dispute. If the business collects subscription revenue upfront but recognizes it over time, the deferred revenue liability can be significant. Buyer-favorable: deferred revenue is a current liability that reduces working capital. Seller-favorable: deferred revenue is excluded as it represents pre-paid customer obligations the buyer assumes.

The fix: pin the treatment in Schedule 4.2. Don't leave it to interpretation.

Pitfall 2: bonus accruals

Year-end bonus accruals can swing the calculation. Some sellers historically pay bonuses in Q1 of the following year, accruing the liability through year-end. The buyer's methodology may classify these as current liabilities; the seller may argue they're funded outside operating capital.

The fix: explicitly carve out bonuses funded by the seller pre-close.

Pitfall 3: customer prepayments

Some businesses receive customer prepayments that are accounted for as deferred revenue or as customer deposits. The classification matters: deposits may be excluded; deferred revenue may be included. Pin the treatment.

Tools and references

The free Working Capital Calculator is a spreadsheet with the TTM target methodology, escrow holdback structure, and post-close true-up math built in.

For LOI clause-level guidance that protects working capital, see the LOI Checklist.

For diligence prep that ensures working capital is documented before launch, see the Diligence Prep Checklist.

Bottom line

Working capital trues move 1 to 5 percent of price on most LMM deals. The methodology decides which direction the cash flows.

Sellers who pin five levers in the LOI (averaging period, cost allocation, exclusion definitions, audit rights, dispute resolution) capture most of what would otherwise leak to the buyer. Sellers who accept "customary working capital adjustment" language give the buyer the leverage to define methodology buyer-favorable.

This is real money. On a $30M deal, $1M to $1.5M moves based on methodology choice.

FAQ

What's a "normal" working capital target for an LMM business? Depends on the business. Working capital as a percent of revenue typically ranges 5-25 percent for LMM businesses. Service businesses are at the low end, distribution and manufacturing at the high end. The TTM average over 12 months is the standard reference point.

Can the seller refuse a working capital adjustment? In LMM deals, the working capital adjustment is industry standard. Refusing it altogether is non-starter. Sellers can negotiate the methodology, the audit rights, and the dispute mechanism, but the basic structure (purchase price adjusted to deliver target working capital) is non-negotiable.

How is working capital calculated for a SaaS business? SaaS businesses have low working capital because they typically receive payment upfront (deferred revenue) and pay expenses incrementally. The calculation often results in negative working capital (more current liabilities than assets when deferred revenue is included). The methodology should explicitly address deferred revenue treatment.

What happens if the calculation runs into the next quarter? The estimated close adjustment happens at closing based on a forecast working capital number. The final true-up happens 60-90 days post-close once the actual close-of-business numbers are known. Both adjustments use the methodology pinned in the LOI.

Who pays for the dispute resolution accountant? Standard practice: 50/50 split between buyer and seller. Some agreements assign cost to the losing party; others split based on the magnitude of the adjustment. Pin the cost allocation in the LOI.

Should working capital target be calculated on a calendar or fiscal year basis? Use whichever matches the business's actual operating year. Most LMM businesses use calendar year, so the TTM 12-month average ending the month before closing is standard. Seasonal businesses may use fiscal year if it better captures normalized operating capital.

What if the business is cyclical? Cyclical businesses (cement, agriculture, construction) need careful working capital methodology. TTM 12-month is the minimum. Some sellers negotiate TTM 18 or 24 months for highly cyclical businesses to avoid being penalized for a low cycle at closing.

Is the working capital target the same as the working capital target in the LOI? The LOI states the methodology and provides an estimated target. The actual target is calculated at closing using the methodology and the latest financial data. The methodology is binding; the estimated number is just a placeholder.