Working Capital Adjustment When Selling a Business: What You Need to Know

Note: This article describes Danish company law and typical Danish M&A deal mechanics.

Once you've negotiated a price, many think the matter is settled. For most share purchases, that's not quite the case — a large part of the transfer agreement when selling a business concerns how the price is adjusted if the company's working capital at closing differs from what was assumed during negotiation.

What is working capital?

Working capital is the capital tied up in day-to-day operations — typically inventory, accounts receivable from customers, work in progress and prepayments, less short-term debt like accounts payable. In other words, it's the capital the business continuously needs for operations to function without running out of liquidity.

Why is the price adjusted for this?

The valuation of your business typically assumes a "normal" level of working capital — enough to keep the business running smoothly, but not unnecessarily more. Between the point you agree on the price and the day the deal actually closes, the actual level of working capital may well have changed — inventory could be larger or smaller, receivables could have been collected or grown. A working capital adjustment ensures the buyer pays for the actual level at takeover, not the level that applied months earlier at the start of negotiation.

How the adjustment works in practice

• You agree on a target level ("normal level"): A negotiated, typically historical average level of working capital, used as the basis for the original price.
• At closing, a statement is prepared: The business's actual working capital on the takeover day is calculated and compared to the agreed normal level.
• The price is adjusted: If actual working capital is above the normal level, the price increases accordingly — the seller has left more capital in the business than assumed. If it's below, the price is reduced, because the buyer then needs to inject the missing capital themselves.

Why is this one of the most common points of dispute when selling a business?

Setting the "normal level" is a negotiation matter, not a fixed answer key — and the calculation method itself (which items are counted, and how they're valued) can give rise to disagreement between the parties' accountants. It's therefore crucial to precisely define both the normal level and the calculation method itself in the transfer agreement — not leave it to interpretation after closing, where the parties' interests are typically opposed.

What can you do yourself as a seller?

Avoid letting the business's working capital fluctuate unnecessarily in the period leading up to a deal — for example by deliberately reducing inventory or speeding up collections to "dress up" the figures before closing. Experienced buyers and their accountants will typically discover this kind of thing during due diligence, and it damages trust more than it benefits the price.

Does the same apply to an asset purchase?

The mechanics are the same in principle, but the scope is often less complex, because an asset purchase is typically more limited in which specific assets and obligations come with it. See the difference in our article on asset purchases vs. share purchases.

Frequently asked questions

What normally counts as working capital?

Typically inventory, accounts receivable from customers, work in progress and prepayments, less short-term debt like accounts payable — the precise calculation is specifically agreed in the transfer agreement.

Can the price go up after a working capital adjustment?

Yes. If actual working capital at closing is above the agreed normal level, the price is adjusted upward, because you as seller are leaving more capital in the business than assumed.

Who prepares the working capital statement at closing?

It's typically agreed in the transfer agreement — often the seller's accountant prepares a draft, which the buyer's accountant reviews, with an established process for resolving any disagreement.

Need to negotiate a working capital adjustment? Book a no-obligation call, or read more about what a transfer agreement should generally contain.