Working Capital True-Up Simulator
Model working capital adjustments at closing based on monthly historical data.
Working capital true-ups are how buyers adjust your purchase price based on actual balance sheet items at closing compared to a target level. If your company ends up with less working capital than agreed, you owe the buyer a refund. If you exceed the target, the buyer pays you additional funds. These adjustments often range from 5-15% of transaction value.
Understanding true-up mechanics protects you during deal negotiation. Buyers often set artificially low working capital targets hoping to receive refunds after closing. This calculator helps you model different scenarios and understand the financial impact of various working capital targets.
Working Capital Inputs
| Month | Working Capital | vs Target | % of Avg |
|---|
Understanding Working Capital True-Ups
A working capital true-up adjusts the final purchase price based on your company's actual net working capital (current assets minus current liabilities, excluding cash) at closing versus a target amount. If you agree to a $50M purchase price with a $5M working capital target and close with only $4M working capital, you typically owe the buyer $1M. These adjustments are standard in M&A and affect 10-15% of all deals.
The true-up process happens post-closing during an earn-out or escrow period (usually 60-120 days after closing). Your accountants calculate actual working capital using GAAP principles, compare it to the target, and execute payment adjustments. Disputes over true-up calculations are common and expensive to litigate, so clear target definitions are critical.
Setting Reasonable Working Capital Targets
Working capital targets are typically set as a percentage of revenue or as a dollar amount. A reasonable target reflects your normal operating needs. If you collect receivables in 30 days and pay suppliers in 45 days, your working capital cycle is 15 days of revenue. If monthly revenue is $2M, you'd need $1M working capital. Setting the target lower than this creates risk you'll owe money at closing.
Buyers often propose low targets hoping to trigger refunds. Your role is to justify why your target is reasonable based on cash conversion cycles, seasonal fluctuations, and growth investments. Having 12+ months of historical working capital data (calculated consistently) provides evidence for your target.
Modeling Scenarios with Different Targets
Use this calculator to model how working capital targets affect your net proceeds. A $50M deal with a $5M target is different financially from the same deal with a $4M target because you'll invest more capital to maintain the higher working capital level at closing. Over-funding working capital before closing increases your cost of capital and reduces your net proceeds.
Sophisticated sellers model multiple scenarios: conservative (lower target, lower risk of owing money), realistic (based on historical levels), and aggressive (lower target to reduce working capital). Present the realistic scenario during LOI negotiation, but be prepared to defend why that's appropriate.