When a business owner accepts an offer to sell their company, they often believe the purchase price written in the Offer is the exact amount that will hit their bank account on closing day.
In reality, that number is almost always a moving target until weeks or even months after the keys have been handed over.
The mechanism responsible for this is the Net Working Capital (NWC) adjustment and true-up process. Understanding how this financial machinery works before and after the closing date is critical to ensuring neither the buyer nor the seller leaves money on the table or have any confusions.
The Baseline: Why Net Working Capital Matters
In a standard business acquisition, the buyer is purchasing a living, breathing enterprise that can seamlessly continue operations on Day 1. To do that, the business needs an adequate baseline of liquidity. It has students, teachers, tuition incoming, and prepaid expenses (like insurance) already covered, etc. Conversely, it also comes with short-term obligations like accrued payroll and outstanding reconciliation fundings.
This ecosystem is measured as Net Working Capital (NWC):
{Net Working Capital} = {Current Assets (excluding cash)} – {Current Liabilities (excluding debt)}
In the purchase agreement, both parties agree to a Working Capital Target (often zero in childcare centre settings or a 1 month operation funding amount which can be negotiated). The seller is obligated to deliver the business to the buyer on closing day with exactly that exact amount.
Step 1: The Estimate of Closing Adjustment (At Closing)
On the actual Closing Date (let’s use April 30 as our example), it is logistically impossible to have a perfectly accurate, down-to-the-penny balance sheet. Business is dynamic; invoices are still being processed, and tuition fees are incoming.
Therefore, a few days before closing, the seller’s accounting team prepares an Estimate of Closing Net Working Capital.
- If the Estimated NWC is higher than the target: The purchase price is adjusted upward, and the buyer pays more at closing.
- If the Estimated NWC is lower than the target: The purchase price is adjusted downward, and the buyer pays less.
This gets the transaction across the finish line, but it is only an educated guess based on accrual accounting principles.
Example: Accrued Payroll
Payroll is a classic area where closing adjustments occur because employees are typically paid in arrears.
Let’s say the closing date is April 30, but your payroll cycle runs two weeks behind. On closing day, the staff has only been paid for their hours worked up to April 15. The hours worked from April 16 to April 30 have been earned by the employees but have not yet been processed or paid.
When May arrives, the buyer will be the one cutting the checks to cover that entire late-April pay period. Because those operational hours were worked while the seller still owned the company, that financial obligation belongs to the seller.
To account for this, the unpaid wages for April 16–30 are marked on the closing balance sheet as an accrued liability. This creates a closing adjustment that reduces the Net Working Capital. As a result, the buyer receives a credit at closing and pays less money to the seller, balancing the scales so the buyer is effectively handed the cash needed to pay the staff in May.
Step 2: The True-Up Period (Post-Closing)
The real precision happens during the True-Up Period, which typically spans 60 to 90 days after closing.
Why wait? Because business realities lag behind the calendar.
Consider a classic example: a utility bill. Your Enbridge gas bill arrives on May 15, but the billing cycle covers the entire month of April. Under strict accrual accounting rules, because those utilities were consumed before the April 30 closing date, that expense belongs entirely to the seller.
During the true-up period, the bookkeeping team waits for these trailing expenses to arrive. They retroactively apply them to the April 30 balance sheet as accrued liabilities. Once every trailing invoice, payroll cycle, and customer payment has cleared, the accountants generate the Final Closing Balance Sheet for April 30.
The Goal of the True-Up: To transform the Estimated April 30 balance sheet into the Real, Final April 30 balance sheet.
Step 3: Settling the Difference
Once the final, audited numbers are ready, the buyer and seller compare the Final NWC against the Estimated NWC paid for on closing day.
If the final audited figures reveal that the seller left the business with more working capital than estimated, the buyer owes the seller the difference. If the seller left the business short, the seller owes the buyer.
Depending on how the Definitive Purchase Agreement was structured, this final difference is settled in one of two ways:
Option A: Settle Inside the Holdback
During a business sale, a portion of the purchase price (often 10%) is placed into a lawyer’s trust account—frequently called a holdback. This fund protects the buyer against unforeseen liabilities or indemnity claims. If the true-up determines the seller owes the buyer money, the funds are simply deducted straight from the holdback before the remainder is released to the seller.
Option B: Direct Payment
If there is no holdback allocated for working capital, or if the variance exceeds the trust amount, the parties settle via direct wire transfer. The debtor party typically has a contractually mandated window (e.g., 5 to 10 business days) to make the direct payment once both sides sign off on the true-up calculation.
The Strategic Takeaway
The true-up process is not an administrative formality; it is a frequent battleground for post-closing disputes. Buyers will scrutinize every trailing invoice to argue NWC was lower, while sellers will defend their accounting treatments to protect their payout.
To ensure a smooth transition, ensure your Share Purchase Agreement explicitly defines what components are included in Net Working Capital and outlines the exact timeline for the post-closing adjustment. Clear definitions upfront prevent expensive legal debates later.
