How does the post-closing ninety-day net working capital true-up process actually work, and how do we prevent the buyer from using subjective inventory reserves or aggressive bad-debt write-offs to demand cash back?

Question

Tyler Smith · Accepted Answer

The post-closing working capital true-up is designed to reconcile the estimated working capital delivered at closing against the actual balance on the closing date. Typically, within sixty to ninety days post-close, the buyer prepares a definitive closing balance sheet. If actual net working capital is below the agreed target peg, you write a check to the buyer for the difference. If it is higher, the buyer pays you.

The danger arises when buyers use subjective accounting adjustments on the closing balance sheet to manufacture an artificial deficit. Common buyer tactics include suddenly reclassifying aged inventory as obsolete, establishing aggressive bad-debt reserves against accounts receivable that are sixty days past due, or accelerating accrued expenses that were previously handled differently.

To defend against this, your purchase agreement must specify that the closing balance sheet must be calculated using the exact same accounting principles, policies, and methodologies used to establish the historical working capital peg, applied consistently. If an accounting method was used to set the baseline peg, the buyer cannot unilaterally switch to a more conservative GAAP interpretation to reduce closing assets.

Second, demand explicit definitions and exclusions in the working capital mechanism. For instance, define bad-debt write-offs by an objective standard, such as receivables older than one hundred and twenty days, rather than leaving it to management discretion. Ensure you have the contractual right to access the books and dispute any proposed adjustments before an independent accounting referee. Never leave the final working capital calculation to the buyer without strict contractual guardrails.