TLDR: Most private M&A negotiations end with a headline price everyone remembers and a working capital peg nobody outside the deal team can recall, yet the peg, not the price, decides who collects the last few percentage points of value. Because the adjustment moves dollar for dollar and settles after signing, when neither side can walk away, it rewards whoever treated the mechanism with the same rigor as the valuation itself and quietly penalizes whoever treated it as boilerplate.
A Mechanism Hiding in Plain Sight
Every acquisition agreement states a headline price. Far fewer buyers and sellers spend equivalent energy on the clause that quietly resizes it after signing: the net working capital adjustment. A buyer prices a business assuming it will arrive with enough short-term liquidity, receivables, inventory, and prepaid expenses net of payables and accrued liabilities, to keep operating from day one without an emergency capital injection. If working capital drifts below that assumption before closing, whether through deliberate cash extraction or ordinary seasonal drag, the buyer effectively inherits a smaller, thinner business than the one it valued. The purchase price adjustment exists to neutralize exactly that gap, comparing the working capital delivered at closing against a pre-agreed target, the peg, and moving price dollar for dollar in whichever direction the comparison points.
What makes the mechanism worth board-level attention is the asymmetry between how it is negotiated and what it does. Headline valuation is argued over months, anchored by bankers, comparable transactions, and competing bids. The peg is often finalized as an afterthought late in drafting, handed to accountants once the more visible terms are locked. Yet advisors at Kroll note that raising the working capital target by a dollar is functionally identical to lowering the purchase price by a dollar, and unlike a valuation gap, which can be bridged with an earn-out or a seller note, this negotiation is zero-sum, with no room for creative structuring once the definition is set.
Setting the Number: Why a Trailing Average Wins
The peg is rarely a single balance-sheet snapshot. Because working capital swings with seasonality and payment cycles, dealmakers typically anchor the target to a trailing twelve-month monthly average, adjusted for known non-recurring items identified during diligence. The seller usually proposes a methodology during the quality-of-earnings process before the letter of intent, the buyer stress-tests it during confirmatory diligence, and the number that survives both rounds becomes the contractual peg. The alignment with valuation logic is deliberate: most buyers underwrite enterprise value off trailing-twelve-month earnings, so pegging working capital to the same window keeps both halves of the price internally consistent.
Because the definition, not just the number, decides outcomes, Kroll’s guidance to dealmakers is to resist treating GAAP as self-executing. GAAP is subject to interpretation and management estimation and often permits multiple acceptable treatments for the same item, so agreements that specify precisely how each line will be measured, with worked examples attached, prevent far more disputes than language that simply invokes “GAAP consistently applied.” Baskets or collars, which waive any adjustment below an agreed threshold, add a further safeguard, keeping small, expected fluctuations from becoming friction between parties who otherwise want to close on good terms.
Completion Accounts or Locked Box: Two Answers to the Same Risk
The peg only matters within a completion-accounts structure, one of two dominant approaches to fixing final price. Under completion accounts, the parties agree an estimated price at signing, and the buyer prepares a post-closing balance sheet, typically 90 to 120 days after completion, against which the true-up is calculated and disputed if necessary. A locked box instead fixes the price entirely at signing by reference to a historical, audited balance sheet, with no working capital true-up; the buyer protects itself through leakage covenants barring the seller from extracting value between the locked-box date and completion.
EY’s global transaction law practice frames the choice as a trade-off between accuracy and certainty: completion accounts price the target precisely as of the day the buyer takes control, while a locked box gives both sides price certainty from the moment they sign. Locked boxes have gained ground in seller-friendly markets and private equity exits because they let a fund distribute proceeds immediately, but EY is direct that the structure fits stable, low-volatility businesses far better than targets with genuine swings in receivables or inventory. Where the business is seasonal, growing quickly, or being carved out of a larger group, completion accounts and a properly built peg remain the safer tool.
| Consideration | Completion Accounts | Locked Box |
|---|---|---|
| Price fixed at | Signing (estimate), trued up post-closing | Signing, final |
| Working capital peg used | Yes, dollar-for-dollar true-up | No; leakage covenants instead |
| Best suited to | Volatile or seasonal working capital, carve-outs | Stable, predictable cash flow |
| Main risk | Post-closing dispute | Undetected value leakage before closing |
What Happens When the Two Sides Disagree
Given how much rides on definitions, it is worth being clear-eyed about how often disputes occur and how they resolve. Working capital adjustments have become close to universal in private-target deals: SRS Acquiom’s 2025 study of more than 1,200 private-target acquisitions found purchase price adjustments present in well over 90 percent of deals, up from roughly half a decade earlier. The same study found buyers’ proposed calculations reviewed and ultimately accepted in seven out of ten cases, with contested claims taking less than two months to resolve on a median basis. Disputes are real but rarely protracted, and working capital surpluses, which favor the seller, now appear almost as often as shortfalls that favor the buyer.
When a dispute does escalate, drafting determines whether it plays out as an accounting exercise or something closer to litigation. Merger agreements typically route unresolved adjustment disputes to an independent accountant acting as an expert rather than an arbitrator, a distinction courts treat as substantive. Troutman Pepper Locke’s review of Delaware Chancery precedent explains that an expert is typically confined to deciding a narrow accounting question rather than interpreting the contract, and courts will overturn an expert determination only for fraud, bad faith, or palpable mistake, a materially lower bar than the near-untouchable standard applied to arbitration awards. Parties who leave this choice to boilerplate often discover which regime they agreed to only once a dispute has already started.
Sizing the Guardrail
Because the peg is a zero-sum lever, many deals attach a dedicated escrow to fund whatever adjustment materializes, and its size is itself a negotiated signal of expected risk. An analysis of Goodwin’s deals database found that adjustment escrows on deals valued at $100 million or more typically sit below 1 percent of transaction value and rarely exceed 2 percent, while escrows on smaller deals show far greater variability and can run as high as 14 percent. The pattern reflects scale rather than caution: working capital represents a smaller share of enterprise value as targets grow larger, so a given dollar swing matters less to a bigger deal, while a modest miscalculation on a smaller business can represent a meaningfully larger share of the price. Escrow sizing is a second, quieter negotiation over how much of the deal remains at risk after signing.
Where Neumarz Fits
None of this diminishes the importance of the headline number; it argues for treating the peg as part of the same negotiation, not an afterthought delegated once price is settled. A trailing-average methodology never stress-tested against seasonality, a definition that leans on “GAAP” without specifying disputed line items, or an escrow sized by convention rather than by the target’s actual working capital volatility can each quietly erode a price that took months to negotiate. Neumarz works alongside management teams and sponsors from the letter of intent onward to keep the working capital peg, the completion mechanism, and the escrow sized to the deal’s real risk profile rather than to market habit. When a dispute does arise, that preparation, a defensible methodology, clean supporting schedules, and a dispute clause drafted with the expert-versus-arbitrator distinction in mind, is what turns a working capital claim into a two-month reconciliation rather than a threat to the deal’s value.
References
- Kroll, “Navigating Working Capital in M&A Transactions,” https://www.kroll.com/en/publications/navigating-working-capital-ma-transactions
- Goodwin, “Adjustment Escrows in M&A: Why the 1% Rule Doesn’t Always Apply,” https://www.goodwinlaw.com/en/insights/publications/2024/09/insights-privateequity-ma-adjustment-escrows-in-ma
- DealLawyers.com, “Post-Closing Adjustments: SRS Acquiom Issues Working Capital PPA Study,” https://www.deallawyers.com/blog/2025/01/post-closing-adjustments-srs-acquiom-issues-working-capital-ppa-study.html
- EY Global, “Five Considerations of Completion Accounts vs. Locked Box Mechanisms,” https://www.ey.com/en_gl/insights/law/locked-box-vs-completion-accounts
- Troutman Pepper Locke, “Resolving M&A Price Disputes: Experts or Arbitrators?,” https://www.troutman.com/insights/resolving-manda-price-disputes-experts-or-arbitrators.html
