> ## Content Index
> Fetch the complete content index at: https://blog.sellingyourcanadianbusiness.com/llms.txt
> Use this file to discover other available public pages before exploring further.

# How do working capital adjustments work at closing?
- URL: https://blog.sellingyourcanadianbusiness.com/how-do-working-capital-adjustments-work-at-closing/
- Published: 2023-05-02T13:28:16.000Z
- Updated: 2026-08-14T18:55:54.000Z
- Description: How working capital adjustments and the cash-free, debt-free structure shape the final price a seller receives, and why defining cash and debt is the tricky part.
- Author: Karl E. Sigerist, Jr., ICD.D
- Tags: Articles Sell-Side, Articles Valuation, #review-excerpt-missing-2026-08-14

How do working capital adjustments affect your final sale price?

For a CEO selling a private company, working capital adjustments directly shape the final price by ensuring the buyer inherits an appropriate level of operational liquidity. The key concepts are the cash-free, debt-free (CFDF) structure and adjustments for deferred revenue and past-due accounts.

What are working capital adjustments? They align working capital at closing with a pre-agreed target so the buyer can operate without an unexpected cash injection. Working capital is current assets (cash, accounts receivable, inventory) minus current liabilities (accounts payable, accrued expenses, short-term debt).

The CFDF structure — the price is set without cash reserves or debts. Determine enterprise value (EV), then adjust: Purchase Price = EV + Cash − Debt. On a $6M EV with $1M cash and $0.5M debt, the seller receives $6.5M; reverse the cash and debt and it becomes $5.5M. Defining "cash" and "debt" is the tricky part — for example, outstanding cheques may reduce the cash balance or be treated as debt-like, lowering proceeds. This matters because capital gains are usually taxed more favourably than dividends, so clear documentation protects the seller.

Deferred revenue — this unearned revenue is a liability; if the actual amount ($300,000) exceeds the historical target ($250,000), EV is reduced by the $50,000 excess. If unaddressed and GAAP applies at close, all $300,000 could be treated as debt.

Past-due accounts — overdue receivables carry collection risk; if the actual amount ($100,000) exceeds the acceptable level ($60,000), EV is reduced by the $40,000 difference; if unaddressed, sellers will want all past-due amounts deducted from working capital.

Best practices — set clear targets reflecting history and seasonality, document all financial metrics, define the calculation and terms in the purchase agreement, and agree a dispute-resolution process such as third-party arbitration.

Key facts: working capital adjustments at close

Adjustments align closing working capital to a pre-set target  
CFDF: Purchase Price = EV + Cash − Debt; defining cash and debt (e.g., outstanding cheques) is critical  
Deferred revenue and past-due accounts above target reduce EV; unaddressed, they can be treated as debt  
Best practice: clear targets, documentation, a defined calculation and a dispute-resolution mechanism

If this content was useful, the rest of the Selling Your Canadian Business library is one click away. Visit [www.sellingyourcanadianbusiness.ca](https://sellingyourcanadianbusiness.ca/?ref=blog.sellingyourcanadianbusiness.com) for a monthly newsletter, audio podcast, and video interviews with Canadian advisors. Subscribe now to The Canadian Exit Briefing for exclusive articles, guides and reports written for Canadian business owners and their advisors. Pass this article along to another owner who is working through the same questions.

Disclaimer: This article is for general informational purposes only and does not constitute legal, tax or financial advice. Consult qualified advisors regarding your specific circumstances.