Working Capital Adjustment When Buying a Business in Australia: A Buyer's Guide

A working capital adjustment is a mechanism in a business sale that ensures the buyer receives the business with an agreed level of day-to-day funding in place. In plain terms: when you buy a business in Australia, you expect it to arrive with enough cash, stock, and receivables to keep operating — not stripped bare by a seller who spent the last three months collecting every invoice and paying nothing. The adjustment either reduces or increases the final purchase price at settlement, depending on whether the actual working capital delivered is above or below an agreed target (called the "peg").

For buyers of small and medium businesses in Australia — think trades, landscaping, cleaning, pest control, any service business with employees and accounts — working capital is one of the most contested issues in a deal. It's also one of the most misunderstood.

What Working Capital Actually Means in a Business Sale

Working capital is current assets minus current liabilities. In a business sale context, the formula is typically:

Working capital = Trade receivables + Inventory + Prepaid expenses − Trade payables − Accrued liabilities

Cash is usually excluded (the seller takes it). Debt is excluded. Tax liabilities are often excluded. What you're left with is the operational funding the business needs to function normally — the money tied up in stock on shelves, invoices owed by customers, and bills owed to suppliers.

In a healthy service business, working capital might look like this: $180,000 in outstanding invoices from customers, $40,000 in materials and stock, $60,000 owed to suppliers — giving you net working capital of $160,000. That $160,000 is what allows the business to meet its payroll and supplier payments while waiting for customers to pay. Without it, you'd need to fund that gap from your own pocket from day one.

This is covered in depth in Module 6 of the Playbook, which walks through all the deal structure and financing considerations that matter in an Australian SME acquisition.

What the Working Capital Peg Is — and Why It Matters

The working capital peg (also called the target or benchmark) is the level of net working capital the seller agrees to deliver at settlement. It's usually calculated by averaging monthly working capital over the prior 12 months of trading — the idea being that "normal" is what the business historically operated with.

If the seller delivers more working capital than the peg, the purchase price increases. If they deliver less, the price decreases. The adjustment is dollar-for-dollar against the peg.

Here's why this matters: in the months between signing a sale agreement and settlement, a motivated seller can dramatically drain working capital without technically breaching any standard contract term. They can collect receivables faster, delay paying suppliers, run down stock. The business looks fine on paper but arrives at settlement without the operational cushion that justified the price you paid. One rule of thumb used in Australian SME deals: every dollar of missing working capital is a dollar of cash you'll need to inject in the first 90 days.

I spoke to a broker last year who described a deal where the buyer paid $850,000 for a commercial cleaning business and discovered at settlement that the seller had collected three months of receivables in the final six weeks — leaving the buyer with working capital about $120,000 below the peg. The purchase price adjusted down, but the buyer still had to fund the gap in supplier payments while rebuilding the receivables book. Not fatal. Not fun.

How the Adjustment Mechanism Works in Practice

Most Australian business sale agreements use one of two structures: a locked-box or a completion accounts mechanism.

Locked-box: The working capital is fixed at a specific historical date (the "locked-box date"), and the seller warrants that no value has leaked since then. The buyer pays a fixed price. Simpler, but requires high-quality historical accounts and a short period between locked-box date and settlement. More common in larger deals where the accounts are properly audited.

Completion accounts: The actual working capital is measured at settlement, compared to the agreed peg, and the price adjusts. This is the mechanism used in most small business transactions in Australia. It requires both parties to agree on:

What's included in working capital (the definition — get this in writing early)
The accounting policies used to measure it (consistent with how the business has historically prepared its accounts)
Who prepares the completion accounts and when
The dispute resolution process if the parties disagree

That last point is where things get messy. Most standard business sale agreements give the seller's accountant the first cut at the completion accounts, with the buyer having 15–30 days to review and raise objections. If there's a dispute, it goes to an independent accountant (usually agreed in advance) whose decision is binding. In a small business deal, this process can cost both sides $20,000–$50,000 in accounting and legal fees if it's contested — which is often more than the disputed amount itself.

What Gets Included and What Gets Excluded

This is the most common source of disagreement. The definition of working capital should be negotiated and agreed at the Letter of Intent (LOI) stage, not left to the lawyers to sort out in the SPA (which is how you get to 11pm on a Friday arguing about whether a GST refund counts as a current asset).

Typically included:

Trade receivables (money owed by customers)
Inventory and raw materials
Prepaid expenses (insurance, rent paid in advance)
Trade payables (money owed to suppliers)
Accrued expenses (wages accrued but not yet paid, etc.)

Typically excluded:

Cash (seller takes it)
Debt and interest-bearing liabilities
Income tax liabilities and tax refunds receivable
Employee entitlements (annual leave, long service leave — these are often dealt with separately)
Intercompany balances
Deferred revenue where the service hasn't yet been delivered

Employee entitlements are a particularly Australian wrinkle. Long service leave and annual leave accruals can be significant in a business with long-tenured staff. Whether these sit inside or outside the working capital definition — or are treated as a separate price adjustment — needs to be explicit in the agreement. Don't assume your lawyer or the seller's accountant has handled it.

For a detailed checklist of what to verify before settlement, see the Settlement Day Checklist. And when thinking through the broader structure of the deal, the Deal Structure Comparison Framework covers how working capital interacts with earn-outs and vendor finance.

Negotiating the Working Capital Target

The peg should reflect the business's actual operational requirements — not the seller's preferred number. In practice, sellers often propose a peg based on a period that makes their working capital look higher than normal (say, a month where they invoiced a lot and nothing had come due yet). Buyers should push for a 12-month trailing average, seasonally adjusted if the business has obvious peaks and troughs.

A few things worth negotiating:

Seasonality bands. If you're buying a landscaping business in Melbourne, working capital at the end of summer will look very different from working capital at the end of winter. A sensible peg accounts for this; a simple average can misrepresent the business at the specific point of settlement.

Debtor ageing. Receivables more than 90 days old should arguably be excluded from working capital (or heavily discounted) because they're unlikely to be collected. If the seller's working capital calculation includes a large amount of old receivables that are effectively bad debts, you're overpaying.

Inventory valuation. For businesses that carry stock, inventory should be valued at cost (not selling price) and old or slow-moving stock excluded or discounted. I've seen deals where the seller's inventory number included parts that hadn't moved in three years (still on the books at original cost, somehow).

The collar. Many SPA negotiations include a collar — a range within which no adjustment is made. If working capital delivered is within, say, $20,000 of the peg in either direction, the price doesn't move. This avoids arguments over small timing differences and is worth building into the agreement.

The Link Between Working Capital and Deal Structure

Working capital interacts with other deal structure elements in ways that aren't always obvious.

In an asset sale vs share sale, the working capital treatment differs. In an asset sale, you're typically buying specific assets including the receivables and inventory — so you need to be explicit about which assets you're taking and at what value. In a share sale, you're buying the whole company and the working capital question becomes: what's left inside the company at settlement?

In deals with earn-out agreements, the working capital peg can interact awkwardly with the earn-out metrics. If earn-out is based on revenue or EBIT in the post-settlement period, a seller who deliberately runs down working capital before settlement to release cash will often find they can't rebuild it fast enough to hit their earn-out targets — which is a useful alignment mechanism, but not one you should rely on.

And in deals with vendor finance — where the seller leaves part of the price outstanding as a loan — a working capital shortfall at settlement creates an obvious structural tension. You're meant to be paying the seller back from business cash flow, but if working capital is light, the cash flow isn't there.

How to Verify Working Capital During Due Diligence

Working capital verification is part of financial due diligence and should happen before you're committed to a price. The key steps when verifying the financials:

Get a monthly working capital schedule for the past 24 months. You want to see the seasonal pattern and identify any outlier months. A business whose working capital is flat every month is either very steady or someone's massaged the numbers.
Reconcile receivables to source documents. The aged receivables report should tie to individual invoices. Ask for the 10 largest customers and verify the invoices exist and are legitimate. Receivables that don't appear in the ageing schedule but appear in the accounts are a red flag.
Check the debtor ageing. What's the proportion over 60 days? Over 90? Over 120? A business with 30% of its receivables over 90 days has a collection problem, and you'll be the one solving it.
Reconcile payables to supplier statements. Same logic. You're checking that the amounts owed to suppliers match what the suppliers think they're owed.
Value the inventory independently. If the business carries significant stock, get an independent stock count if you can. At minimum, ask for the inventory report and check it against recent purchases and sales.
Calculate your own working capital figure using the agreed definition and compare it to the seller's number. If they're materially different, understand why before you proceed.

Post-Settlement Working Capital Disputes

The period after settlement is when working capital disputes tend to surface. The completion accounts are usually prepared by the seller within 30–60 days of settlement, using accounting policies agreed in the SPA. If you disagree with how the accounts have been prepared, you notify the seller within your review period and the parties try to resolve the difference.

The most common disputes:

Receivables written off post-settlement. The seller included them in working capital; you've now collected the debts and some are bad. Whether these reduce the working capital calculation depends entirely on the SPA definition.
Inventory adjustments. Stock that turned out to be obsolete or damaged, included in the seller's working capital number but worthless.
Accrued liabilities disagreements. The seller's calculation didn't include a leave accrual, or a warranty claim, or a supplier invoice that arrived after settlement.
Accounting policy disagreements. Revenue recognition, provisioning for bad debts — if the SPA doesn't specify the policies, both sides use different ones and get different numbers.

The lesson: spend time at the SPA negotiation stage agreeing on the accounting policies for the completion accounts. It's boring. Your lawyer will charge you for the time. It's still worth doing — because "consistent with historical practice" is not a sufficiently precise definition when someone has $80,000 on the line.

For more on the settlement process and what happens in the final stages of a deal, that article covers the full sequence from SPA signing to completion.

Frequently Asked Questions

What happens to working capital when a business is sold? Working capital is measured at settlement and compared to an agreed target (the peg). If the seller delivers more than the target, the price goes up. If less, the price comes down. Cash is usually kept by the seller; the buyer gets the operating assets and liabilities.

How do you calculate working capital when buying a business? Working capital equals current assets (receivables, inventory, prepaid expenses) minus current liabilities (payables, accrued expenses). Cash and debt are typically excluded. The specific items included are agreed in the Sale and Purchase Agreement.

What is the working capital adjustment after acquisition? It's a price correction made shortly after settlement, once the actual working capital at completion has been measured. If the delivered working capital differs from the agreed peg, one party pays the other the difference — dollar for dollar.

What does working capital adjustment mean? In a business sale, it's the mechanism that keeps the buyer from receiving a stripped business. It adjusts the purchase price to reflect the actual operational funding delivered at settlement versus what was agreed.

What is a typical working capital target for an Australian small business? It varies by industry, but the peg is typically set at the 12-month trailing average of monthly working capital. Service businesses with no inventory might have a peg of a few weeks of payroll and payables; businesses with significant receivables or stock will have higher pegs.

The Bottom Line

Working capital adjustments are one of the drier parts of a business acquisition — which is probably why so many small business buyers either ignore them until the SPA lands on their desk, or accept whatever number the seller's accountant proposes. Both approaches are mistakes.

The working capital peg determines whether you receive a business that can function from day one or one that needs an immediate cash injection. Negotiating it properly, defining it precisely, and verifying it during due diligence are not optional extras. They're as fundamental as the price itself.

If you want to follow along as I document what actually happens in live deals — the numbers, the disputes, the things that go wrong at 4:57pm on settlement day — subscribe to The Leveraged Worker newsletter for the unfiltered version.

And if you're working through the broader deal structure decisions, Module 6 of the Playbook covers bank lending, equity structures, vendor finance, earn-outs, and personal guarantees alongside the working capital mechanics.