The price in the LOI is rarely the final cash number

A deal announced at $12 million may still require adjustments for cash, debt, transaction expenses and net working capital. The parties often agree on a normalized level of operating liquidity that the business must deliver at closing. The adjustment protects against a business arriving with substantially less operating capital than expected—or gives the seller credit for an agreed excess.

Define the components before choosing the target

Net working capital commonly starts with selected current assets minus selected current liabilities, but there is no universal deal definition. The purchase agreement must state which receivables, inventory, prepaid expenses, payables, accrued bonuses, deferred revenue and other items count.

An illustrative business with $1.8 million of included current assets and $1.2 million of included current liabilities has $600,000 of closing working capital. If the agreed target is $750,000, the preliminary downward adjustment is $150,000, before any other price mechanics. This is an example, not a standard formula for every acquisition.

Accounting policy is part of the bargain

A requirement to use GAAP can leave room for disputes where the target was calculated using the seller’s historical practices. The parties should establish an order of precedence among specifically negotiated accounting principles, consistent historical methods and generally accepted accounting principles.

A buyer may favor a larger reserve for doubtful receivables; a seller may point to prior collection history. The agreement should say how reserves are measured and which party controls the calculation.

Set a realistic true-up procedure

Typically one party prepares a post-closing statement, the other has a defined review and objection period, and unresolved accounting items go to an independent accountant. The agreement should specify access to records, the accountant’s authority, the scope of disputed items, and payment timing.

Do not treat the accountant as an all-purpose arbitrator for claims that the buyer breached operating covenants or withheld documents. Contract interpretation and accounting calculations can require different dispute processes.

Avoid double counting

Debt-like items, unpaid transaction expenses and working-capital liabilities can overlap. A seller should not pay twice for the same obligation through separate deductions. The parties should test sample closing statements before signing and compare them with the LOI and funds-flow schedule.

For transaction-specific guidance, see Alex Nahai Law’s related legal services. Legal advice depends on the documents and circumstances of each matter.

This article provides general information, not legal advice, and does not establish an attorney-client relationship.