App version: 0.1.0

Understanding Working Capital Adjustment

Working Capital Adjustment Defined & Formula
Susan Guillory
Susan GuilloryUpdated July 6, 2023
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re considering selling a business–or buying one–something you need to pay attention to is working capital. As a seller, you want to maximize the working capital you have on your balance sheet to make your business appealing, and as a buyer, you want to make sure you understand how much of the working capital that’s listed on the balance sheet will be yours once the sale goes through.To that end, understanding working capital adjustment may come in handy. What is a working capital adjustment? Let’s find out. 

What Is Working Capital Adjustment?

Before we address the adjustment part, let’s first look at working capital defined for a refresher. Working capital refers to a company’s current assets minus liabilities. It appears on the balance sheet.This number can fluctuate daily as a business brings in more revenue and pays expenses. Buyers look at the working capital ratio to understand a company’s abilities to pay off its debts. When a business goes up for sale, the company takes a snapshot of its balance sheet. The working capital listed there probably won’t match what appears once the business is sold. A buyer doesn’t want to overpay for a business if the amount of working capital diminishes significantly. That’s why a working capital adjustment (also called net working capital adjustment) might be a good idea.Recommended: Guide to the Working Capital Cycle

When Do Working Capital Adjustments Occur?

A working capital adjustment needs to be a part of the negotiation conversation from the start. Both the buyer and seller need to be clear on which, if any, assets on the balance sheet will be transferred to the new owner. Because the working capital factors into the valuation of the company, removing some or part of it from the equation likely will create a change in the valuation if that number is significant.If the seller plans to take a large amount of the working capital to cover expenses, the buyer may need to explore different kinds of business loans to fund the working capital budget herself to ensure there’s enough money for the business to operate. Another important discussion between the buyer and seller is on how much it costs to operate the business over a given period of time so that the buyer has an understanding of how much working capital she should negotiate to keep.The actual adjustment may not happen until closing, if working capital fluctuates drastically. However, the buyer and seller need to agree on how the adjustment will occur early on. This could be a dollar-for-dollar adjustment that reduces the selling price by the amount of working capital that the seller retains or spends. It could be a de minimus or capped adjustment, where adjustments are only made up to a specified level. Whatever the adjustment strategy, this needs to be agreed upon early.Recommended: Working Capital Management Explained

Working Capital Adjustment Formula

While the formula for working capital itself is simply current assets minus liabilities, to calculate the working capital adjustment, the buyer and seller need to agree on a working capital target. Let’s dive deeper.

Working Capital Targets

This is an estimate of the amount of working capital that will be available at closing on the sale of the business. This amount should be sufficient to operate the business for a specified period of time.Any amount over or under this target will need to be paid either to the buyer or the seller, accordingly.Here’s a working capital adjustment example. Let’s say the balance sheet on January 1, when the business goes up for sale, shows working capital of $500,000. This is appealing to an investor. But on February 15, the company used $400,000 of that to pay debts. The seller might believe she’s acquiring a company with half a million in working capital, when that’s not true.By including a working capital adjustment in the negotiation of the sale of the business, the buyer can be protected from a loss like this. The buyer can insist that the valuation be reduced, based on the fact that $400,000 is now gone from the company.Likewise, if the company suddenly comes into an extra $300,000 between the listing of the business and the purchase that might increase the initial valuation and thus the selling price. If the price were to increase at the last minute, the buyer might have to take out an additional business working capital loan to purchase the company, or the agreement might be for the seller to take the extra working capital.Having a working capital adjustment eliminates unexpected surprises like these and instills trust between the buyer and seller.Recommended: Guide to Business Financial Statements

Pros and Cons of Working Capital Adjustment

Understanding how working capital adjustment affects the sale of a business is important, as is looking at both the benefits and drawbacks.
Ensures seller isn’t taken advantage of by a loss of working capitalSeller may get less working capital from the sale
Keeps buyer and seller on the same pageBusiness value can go down
Seller has enough money to operate company after transferNegotiations may slow down sale process


It’s in a seller’s interest to have the highest possible value for a company that’s for sale, but without a working capital adjustment, the buyer could pay more than the actual value of the business after working capital is removed. The adjustment remedies this issue.It also fosters healthy communication during the negotiation process, as well as provides transparency. And with the working capital adjustment, the seller is assured to have enough capital to run the business without having to take out a loan.


The seller may have visions of taking out a chunk of working capital to cover debts or pay himself once the deal goes through, but a working capital adjustment prevents this from happening. If a sizable amount of working capital is removed from the balance sheet, the business valuation may go down, and therefore the business may be sold for less than the asking price. Finally, agreeing on a working capital adjustment may take time in the negotiation process, which may slow down the sale.Recommended: How to Apply for a Business Loan

The Takeaway

Including a working capital adjustment in the negotiation of the sale of a business protects the seller from overpaying for the company and creates clear communication between the buyer and seller. Start the conversation about working capital adjustment early, and be willing to negotiate to find a happy medium for both the buyer and seller.

 3 Small Business Loan Tips

  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find a small business loan offer from a lender.
  2. If you are launching a new business or your business is young, lenders will consider your personal credit score. Eventually, though, you’ll want to establish your business credit.
  3. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.

Frequently Asked Questions

What is the point of working capital adjustments?
Is working capital added to the purchase price?
Does negative working capital adjustment exist?
Photo credit: iStock/Delmaine Donson

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
Share this article: