What is a Working Capital Adjustment

When someone sells a business, figuring out the working capital adjustment is a big deal. It's a part of selling and buying companies that can really change the final price. Our latest insight makes this easier to understand. We explain what working capital adjustment is, why it matters in deals where no extra cash or debt is involved, and how it's calculated. Knowing this helps both the buyer and the seller make sure the business can keep running smoothly after it's sold.

When selling a business set up as an S corporation or LLC, the working capital adjustment is another key point. It can significantly alter the final selling price. Understanding this helps ensure the deal is fair for both the seller and buyer.

Highlights from the Video:

Cash-Free, Debt-Free Transactions:

When selling a business on a "cash-free, debt-free" basis, the seller keeps any cash left after paying off debts. However, there’s a catch: the working capital adjustment ensures the business can operate smoothly after the sale.

Defining Working Capital Adjustment:

A working capital adjustment makes sure the business has enough "gas in the tank" to keep running after it's sold. This is done by calculating the working capital peg: you take the business's current assets (like inventory and accounts receivable) and subtract its current liabilities (like accounts payable). This peg shows how much money needs to be left for the business to continue running smoothly.

Calculating Working Capital Peg:

The working capital peg can be figured out monthly, quarterly, or yearly. To calculate it, you add up all the current assets of the business, such as inventory and money that others owe to the business. Then, you subtract the current liabilities, which is the money the business owes to others. This peg helps to check if the business has enough working capital when it's sold to the buyer, making sure it can keep running smoothly after the sale.