The buyer is trying to hold back a significant portion of our purchase price in a working capital escrow, claiming our accounts receivable are aged and high-risk. How do we structure the true-up process to avoid a post-close cash drain?

Question

Tyler Smith · Accepted Answer

A net working capital true-up is one of the most common post-closing battlegrounds. Buyers will attempt to set a high working capital target peg, and then, ninety days after closing, they will audit the balance sheet and claim your accounts receivable are uncollectible or your inventory is obsolete. They then demand a dollar-for-dollar reduction in the purchase price, funded by a dedicated working capital escrow.

To prevent this cash drain, you must establish clear accounting parameters in the definitive purchase agreement. Define exactly how net working capital will be calculated, specifying that the calculation must strictly follow your historical accounting practices rather than general GAAP rules. Exclude any accounts receivable that are less than ninety days old from being written off, and require the buyer to return any aged receivables to you if they choose not to collect them.

Operationally, your finance seat on the Accountability Chart must run a rigorous cleanup process before signing the LOI. In your weekly Level 10 Meeting™, prioritize collecting outstanding balances and tightening your billing terms. This ensures your working capital peg is based on clean, realistic operational data rather than inflated, aged receivables. Never agree to a separate working capital escrow; instead, insist that any working capital adjustments be netted against the general indemnity escrow or settled through an independent accounting arbitrator. Keep your cash where it belongs: in your bank account.