Working Capital Adjustments Explained: Why a $6 Million Business Sale Fell Apart Over $80K

Ryan (0:00): The seller didn’t lose $80,000. He lost $6 million over a number that was 1.3% of the deal. And the worst part? One sentence could have saved the whole thing. Eight seconds of air. Nobody in the room said it.

Jon (0:20): Welcome to From Burnout to Bought Out, the podcast for business owners who are tired of being the hardest-working, lowest-paid employee in their own company.

I’m Jon, joined as always by Ryan, and together we’ve spent years inside owner-led businesses, helping founders go from running on fumes to running a business that actually runs without them.

Every episode, we break down the real problems nobody talks about—the burnout, the bottlenecks, the blind spots—and show you what it looks like to build a business that’s profitable, sellable, and doesn’t need you in the building every day to survive.

Whether you’re grinding through a plateau, thinking about an exit, or just trying to take a vacation without your phone blowing up, you’re in the right place. Let’s get into it.

Ryan (1:00): Jon, this is the episode I’ve been waiting for.

Jon (1:03): Ryan, I know. This is amazing. Love it.

Ryan (1:07): Another M&A topic.

Jon (1:10): Yeah. But I say that every, every time. This is the best episode ever.

Ryan (1:15): Well, you know, our three subscribers suggest that they’re getting better right now. We’re at 3.3 subscribers. So there you go.

Jon (1:24): Mom, Dad, and the dog.

Ryan (1:26): I think the dog stepped on my phone accidentally and it subscribed.

Jon (1:31): Good thing it didn’t hit something else on your phone.

Ryan (1:34): Yeah. You know what? It’s smarter than I am.

Jon (1:37): It’s certainly more comfortable. He gets to sleep all day.

Jon (1:41): You watched a $6 million deal die. Not over fraud, not over a bad business—over $80K. Tell us what happened.

Ryan (1:49): So, composite story. Every detail is real. Okay. It’s a $6 million service business. Good revenue, clean margins, verbal handshake at $6 million. The LOI is signed.

The seller told his wife champagne was almost in the cart.

Then the lawyers start the purchase agreement around page 47—the working capital adjustment.

And that’s where the deal started bleeding.

Three weeks later, it was dead.

Not the business. Not the price.

But two sets of attorneys spent 21 days fighting over $80K.

$80K on $6 million is 1.3%. That is what killed it.

The seller thought that the buyer was acting in bad faith.

The buyer thought the seller was hiding something.

But neither was true.

The real cause? Nobody explained the mechanism before the LOI.

So it felt like a bait and switch.

It wasn’t a bait and switch.

This is just M&A.

Jon (2:54): Insane. Insane. Tiny percentage of overall revenue.

But let’s back up a little bit.

For everybody listening who’s never bought or sold a business, what’s a working capital adjustment? Why does it exist?

Ryan (3:04): So I’m really glad that you asked that, Jon.

It’s kind of the simplest version I can say.

The buyer is buying a running machine, and it needs fuel in the tank on day one.

That fuel is working capital—cash, receivables, inventory.

And you have some payables.

Essentially, it’s cash, receivables, and inventory minus what you owe.

The buyer isn’t paying $6 million then funding two months of payroll out of pocket.

You’re selling a business, not an empty building.

Both sides agree on a target, which is called the peg—the normal expected level of working capital.

So if a business carries $400,000 in net working capital, the peg is $400,000.

At close, if it’s above the peg, the buyer pays you the difference.

If it’s below it, you owe them dollar for dollar.

Sounds simple.

It is not.

It’s what counts and how you calculate it that is where deals go to die.

Jon (4:10): So basically I can’t just sell you the business, keep the cash in the drawer, and put it in my pocket, right?

Ryan (4:16): You can try.

The buyer will notice the drawer is empty on day one.

And it gives them nothing.

They have to immediately inject cash, which is why we have the working capital adjustment.

Jon (4:25): Got it. Understood.

So what went wrong with this one?

Where did the $80K gap come from?

Ryan (4:33): So in this deal, the peg was set at $420,000.

Both sides agreed to it at the LOI.

Then the buyer’s QoE firm—Quality of Earnings, the same crew from the Buy Box episode that we did previously—they excluded stale receivables.

Ryan (4:51): They reclassified a prepaid expense. They fixed an accrual the bookkeeper hadn’t booked consistently for two years.

The seller pushed back on every single adjustment, and the buyer held firm.

Each side was technically defensible. That’s the nightmare.

Both are right.

And the gap was $80,000.

The seller heard, “You agreed to $6 million. Why are you nickel-and-diming me?”

The buyer heard, “The working capital you promised isn’t there. We’re not paying for an empty building. We’re not paying for air.”

Both are very reasonable.

Neither could see the other side.

But the deal didn’t die over the money.

It died over email.

Jon (5:26): Right. That’s ridiculous.

And it’s often the case when legal representatives get very heavily involved.

It seems like both sides are right, but it was a bad outcome.

Ryan (5:35): Yeah. Welcome to deals, right?

Two right answers, $80,000 apart, and nobody blinks.

Jon (5:43): Quick break.

A fitting one, given that we just watched $80,000 burn a $6 million deal to the ground.

Here it comes.

This episode is brought to you by Leavitt Electric out of Dover on the New Hampshire Seacoast.

Twenty-plus years keeping the lights on for homes and businesses up and down the coast.

And they fit this episode perfectly because everything we just described is electric.

Ryan (6:09): Go on.

Jon (6:11): The $80,000 was a loose connection nobody inspected.

It sat behind the wall for two years.

Then the deal got into the data room.

Somebody opened the panel, and it sparked.

Ryan (6:24): Wow. I like it.

Jon (6:25): So the whole episode is the difference between it works and it’s up to code.

That’s the episode in five words.

Your panel works.

The lights turn on.

Then the inspector opens it and finds eight things that’ll fail.

Leavitt does it up to code the first time.

Residential, commercial, industrial.

Get the loose wire fixed before it costs you the house.

Leavitt Electric, Dover, New Hampshire.

Find them at leavittelectrical.com.

Ryan (6:52): That’s brutal.

That’s ridiculous.

$80K out of $6 million is nothing.

So how does something so small blow up so big?

I mean, besides the legal impact as well.

Jon (7:02): It really blew up because nobody told the seller it was coming.

And that’s the core failure of why that happened.

It’s the first-time seller.

There’s no CPA, no attorney, or broker who sat down with him and said,

“After the LOI, there’s a working capital adjustment. The number will change. It’s not a renegotiation. It’s just part of the deal. It’s just another mechanism. So expect it.”

But it felt like an ambush.

An ambush in a $6 million deal flips your lizard brain.

Now it’s like, “Oh, are you coming after me?”

Ryan (7:36): Exactly.

And so they stopped negotiating and started defending.

Every email was a battle.

Every line item was personal.

The attorneys made it worse.

They’re not bad attorneys.

They’re doing their jobs.

They’re trying to win the details.

Nobody’s incentive was to protect the deal.

The deal had no advocate in this case.

So you’ve got $6 million of enterprise value burning in the background while two sets of lawyers argue over accrual timing.

Think about that.

They’re billing $350 an hour each, arguing over accrual timing.

Your lawyer works for you.

Theirs works for them.

But nobody in this case was working for the transaction itself.

And the transaction was worth $6 million—not the short side of $80,000.

Jon (8:24): Right.

Everybody’s got representation except for the deal itself.

The deal showed up alone.

Ryan (8:28): The deal always shows up alone.

Jon (8:32): Digging into something you said—peg and true-up.

Break those things down.

If you get into these situations where something unexpected comes up, ideally it gets solved because somebody is educated around the process.

You’ve got expectations around it.

But break down peg and true-up because most owners haven’t really heard those terms.

Let’s educate them.

Let’s help them.

Ryan (8:56): So peg is not just for pirates’ legs, right?

It’s the target level of working capital.

Both sides agree on the normal level the business carries.

Usually it’s a trailing 12-month average, sometimes a trailing six months.

Sometimes it’s negotiated depending on circumstances, seasonality, and those kinds of things.

A true-up is the adjustment after closing.

At close, you estimate working capital using your most recent numbers, usually the month-end before closing.

So you close on the estimate.

Then 60 to 90 days later, the buyer’s accountants calculate the actual working capital on the exact day of closing.

If it’s higher than the peg, the buyer sends a check.

If it’s lower, the seller sends one back.

So here’s where it gets ugly.

The true-up hits after you cash the big check.

You’re mentally done.

You’re on the beach.

You’re sipping your piña colada.

Then—bam.

The phone rings.

You owe $120,000 because receivables came in light.

That’s the call that drops your stomach at 3:17 a.m.

Owners lose their minds over the true-up.

Not because the math is wrong.

Because nobody told them it was part of the deal.

They think close means close.

In M&A, close means mostly close.

Pending a few things that can still cost you six figures.

Jon (10:24): Asterisk to close.

Close has an asterisk.

Close has a footnote.

And the footnote has six figures in it.

Yeah.

People need to know that.

And they need to plan for that.

What are the things that usually blow up when going through that process?

The working capital negotiation.

Where does the fight normally happen?

Let’s give people more information on that too.

Ryan (10:48): So almost every time, Jon, it’s in these five places.

Number one: receivables.

The buyer says your 90-day AR is uncollectible.

You say they’re just slow.

“It’s my cousin Vinny. He’ll get there.”

But the buyer doesn’t care.

They take 15% of AR over 90 days, and it’s a direct hit to your working capital.

Inventory.

The buyer walks into the warehouse and calls 20% of your inventory obsolete.

But you’ve been carrying it at full value because nobody wanted to write it down.

Maybe it is obsolete.

You just never made the accounting adjustment.

So the buyer does it for you.

Accruals and prepaids.

It’s really a nerd fight.

This isn’t Fight Club.

It’s Nerd Fight—with pocket protectors and spreadsheets.

They’re arguing:

“Did you book the accrual?”

“Did you amortize the prepaid?”

If your bookkeeping has been inconsistent, the QoE firm will normalize it, and the number moves.

Customer deposits.

Deposits on future work.

The buyer calls it a liability because it’s money for work that hasn’t been performed yet.

That shifts the formula.

But it surprises owners every single time because it’s sitting in their cash account.

Then owner’s payables.

Personal expenses run through the business and get settled later.

The buyer sees real payables owed to you, but because of messy bookkeeping, it costs you at the closing table.

It costs you a check while you’re sitting on the beach.

Jon (12:27): Customer deposits are basically a liability?

Isn’t collecting money a good thing?

Ryan (12:34): You’re collecting money, which is good.

But you haven’t done the work yet.

The buyer is buying the obligation to perform that work—not the deposit.

Jon (12:45): Gotcha.

Okay.

So there’s got to be an adjustment on that.

That’s annoyingly fair.

Ryan (12:50): Yeah.

Unfortunately, like I said, both sides can be right, and the deal still goes sideways.

Jon (12:57): Quick break.

And Ryan, I want it on the record that I have behaved this episode.

Ryan (13:01): Noted.

Jon (13:03): Still brought to you by Leavitt Electrical on the Seacoast.

And here’s the tie-in to what Ryan keeps saying about running a mock inspection on your own books.

The mock QoE.

You don’t wait for the buyer to find the problems.

You bring in a pro who finds them first.

That’s exactly what Leavitt does with the panel.

They open it.

They tell you what’s going to fail.

You fix it on your terms—not at the worst possible moment.

And these are credentialed people licensed in New Hampshire, Maine, and Massachusetts.

They’ve even got the bucket truck.

Jon (13:33): Oh, as a Canadian, I have a deep respect for a man with a bucket truck. I will not be explaining why.

Ryan (13:37): That’s your one.

Jon (13:39): That’s my one point.

Ryan (13:42): That is—the inspection is cheaper than the fire.

Leavitt Electric, Dover, New Hampshire.

It’s all at leavittelectrical.com.

Back to it.

Generally, now we’re talking about $80K in this instance, but generally how much money are we talking about on a typical deal?

How big is a working capital adjustment?

Jon (14:00): That’s a good question.

On a $5 to $10 million deal, the adjustment can be anywhere from $50,000 to a quarter of a million.

Sometimes more.

The range is so wide because it really depends on how clean or messy the books are.

If you’ve got clean books, consistent accruals, current AR, and no personal expenses, it’s boring.

It’s really just a rounding exercise.

Nobody’s going to fight over that.

But if you’ve got messy books, stale AR, cousin Vinny still owes you money, you haven’t reconciled your prepaids, you’ve got obsolete inventory sitting on the books, and that nice big truck you ran through AP—it can be massive.

This is where everybody fights.

It can take weeks.

The math nobody does is that a $200,000 dispute doesn’t cost you $200,000.

It costs you deal momentum.

It could cost you the deal.

And the more you fight, the more legal fees pile up.

If you’re fighting for three weeks, you’ve got both attorneys billing.

That’s another $30,000, $60,000, $80,000.

If the deal collapses, you lost $6 million because you couldn’t keep your books clean for the previous 18 months.

That $200,000 fight is the direct consequence of a $5,000 cleanup you skipped two years ago.

That’s the most expensive laziness in M&A.

Ryan (15:38): Wow.

Yeah.

That’s $5,000 you could have spent two years ago.

Instead you’ve got $200,000 on the table, the deal goes south, and you’re spending tens of thousands in legal fees whether the deal closes or not.

That’s crazy.

Those numbers don’t really add up.

Jon (15:55): Well, they’re really the same number, Ryan.

That $5,000 grew into $20,000, $40,000, $100,000.

Ryan (16:02): Wow.

That’s crazy.

I think a lot of this ties back to what we had in the previous episode.

I can’t remember which one.

Good books versus clean books.

Another stellar bookkeeping episode.

Way up there on the list of most boring topics we talk about—but essential.

This is the real-world consequence of having good, clean books.

Jon (16:28): Yeah, you’re absolutely right…

Ryan (19:15): Okay. Now we’re getting into the segment we do this every week.

What should people actually be looking for?

What can they do to prepare for it?

So if somebody is two to three years from selling—and you’ve said this over and over again—prepare now.

Prepare now because it causes your organization to run better.

But if somebody’s two to three years out, what should they be doing to prepare for it now?

Jon (19:39): Five words: Do it before, not during.

There are five moves you can make.

Every one of them can be done between 18 and 24 months before you go to market.

Don’t do it during the deal—do it before.

Number one: Make your books audit-ready.

Consistent accruals.

Clean prepaids.

Properly aged AR.

Inventory at real value.

If your bookkeeper can’t do this, hire somebody who can—a fractional controller or a fractional CFO with a strong accounting background.

Get somebody in there to do it.

It’s going to be worth thousands of dollars later.

Number two: Know your own working capital number.

That’s right, folks—we’re here to give you homework.

Know your trailing 12-month average.

If you don’t know it, you’re going to have zero leverage when the buyer proposes their peg because you’ll just be reacting to their math.

We always do the calculation, no matter what side we’re on, so we can defend it.

Number three: Clean up your AR.

Collect everything over 60 days.

This is just good cash flow management.

Going back to our Profit First episode—

Ryan (20:48): Oh my God.

There’s another web that’s formulating, Jon.

Jon (20:55): Then write off anything over 120 days.

That’s generally dead.

You’re better off taking the hit on your terms than at the closing table.

And one other thing—if you’re consistently writing off balances over 120 days, you need to revisit your collections process.

That’s a little bonus step.

Number four: Run a mock QoE.

Hire an independent firm to perform a Quality of Earnings review on your books first.

Find the problems.

Then fix them.

It’s going to cost you some money, but you’ll know exactly where to start looking.

And guess what?

It’s going to make you a better business, too.

Every issue you find and fix is one the buyer’s team can’t use to adjust your purchase price.

Your $6 million deal stays a $6 million deal.

Your $420,000 working capital peg stays a $420,000 working capital peg.

Number five: Get an M&A-experienced advisor before the LOI.

Not just a business broker.

Someone who’s lived through working capital negotiations.

Someone who can tell you what’s normal, what’s aggressive, when to push, and when to let it go.

There are people out there who do exactly that.

The absence of that person killed the $6 million deal.

Nobody knew when to say,

“This is an $80,000 dispute on a $6 million deal. Split it and close.”

Ryan (22:17): We always give people homework.

The previous Buy Box episode was, “Run a mock Buy Box on yourself.”

Audit where you’re the bottleneck.

There are things you can do.

Find the time and run these processes on yourself.

The homework is important because it’s really going to prepare you.

And a word from our sponsor.

This one’s the punchline of the whole episode.

We’ve spent this episode saying,

“Don’t bring a real estate attorney to an M&A knife fight.”

Same energy—

Don’t hand your electrical panel to your brother-in-law with a YouTube tab open.

That’s roughly what our seller did with his deal team.

Get the professional who’s done it 10,000 times.

The Leavitt crew has been wiring the Seacoast for over 20 years.

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Ryan (23:11): That is right.

So leave it to the people whose job it is.

Or as they say when it comes to electrical, leave it to Leavitt.

Leavitt Electrical.

Dover, New Hampshire.

Find them at leavittelectrical.com.

Jon (23:23): Right tool.

Right room.

Right pro.

Don’t bring the butter knife.

On that point, somebody needs to protect the deal itself—not just the client.

How does an owner make sure that happens?

Ryan (23:35): Well, you need someone at the table whose job is to get the deal done, not to win every point.

Your attorney protects you.

Their attorney protects them.

Both are doing their jobs when they fight.

But the deal has no lawyer.

The deal needs an advocate.

That’s the transaction advisor.

The deal quarterback.

Sometimes the investment banker.

The person who says,

“This issue is worth $40,000. We’ve already spent $35,000 arguing it. This is now negative ROI. Split it and let’s move on.”

In the deal that died, that person didn’t exist.

The seller had a local attorney who had done real estate closings—never an M&A deal.

The buyer had a sharp M&A firm running circles around the seller.

One side brought a butter knife.

The other brought Rambo’s knife.

There wasn’t even a fair fight to begin with.

It wasn’t about the money.

It wasn’t about the business.

It wasn’t the buyer’s intent.

The wrong team was representing the transaction.

By the time the seller realized it, trust was gone.

The deal was dead.

The team that runs your business is not the team that sells your business.

One gets the business ready.

The other gets the transaction done.

Your CPA files your taxes.

Your local attorney handles your contracts.

But neither has necessarily negotiated a working capital adjustment.

You’ve got to bring in people who have—before the LOI, not after the first fight.

They can work alongside your existing advisors to make sure everything gets done correctly.

Jon (25:18): Yeah.

It’s about having representation that lowers the temperature on all sides.

You’re going through one right now, and there’s a lot of temperature reduction needed in certain aspects.

I know we can’t share details, but because you’re so involved with every component of the deal, you’re able to bring everyone to the table and work through those issues.

That’s an important distinction.

You’re representing the deal itself.

Ryan (25:49): Right.

You’re absolutely right.

Jon (25:51): So if an owner is listening and they’ve never sold a business before, what’s the one thing they should take away from this before we get to our official takeaway?

Ryan (26:02): The headline number is not the final number.

It never is.

Six million dollars is just the starting point of the negotiation.

Then you have working capital adjustments, escrow, holdbacks, earnouts, and a dozen other mechanisms that shift risk between buyer and seller.

None of it is bad faith.

It’s simply how deals work.

But if nobody explains those mechanisms, it feels like bad faith.

And that feeling kills transactions.

That’s the lizard-brain response coming back.

Know the mechanisms before you sign the LOI.

Understand working capital.

Understand how the peg is set.

Understand the true-up.

Understand the escrow terms.

You don’t need expert-level knowledge.

Just enough so nothing surprises you when you’re sitting on the beach and get the phone call saying receivables came in light.

In M&A—and really in life—surprises are the enemy of a successful close.

Buyers like predictability.

So do sellers.

Please don’t let an $80,000 dispute kill a $6 million outcome.

That seller didn’t lose $80,000.

He lost $6 million.

Because nobody had the perspective to say,

“This is 1.3% of the deal. Take a breath. Sign the paper. Go live your life.”

That sentence was worth $6 million.

And nobody said it.

Don’t be that seller.

Jon (27:35): That’s crazy.

Know the mechanisms.

Build the team.

Clean the books.

That’s the whole show.

It all came down to that one sentence nobody said.

Eight seconds.

Six million dollars.

Say the sentence.

Alrighty.

Let’s do the takeaway.

What’s the takeaway from this episode?

Ryan (27:56): Alright, folks.

The headline number is never the final number.

That’s just the beginning.

Working capital adjustments, escrow holdbacks, and true-ups aren’t bad faith.

They’re simply how deals work.

But if nobody explains those mechanisms before you sign the LOI, every adjustment feels like betrayal.

And betrayal kills deals faster than bad numbers ever could.

The $5,000 bookkeeping cleanup you skip today becomes the $200,000 dispute that stalls your deal tomorrow.

Clean your books.

Know your working capital number.

Run a mock QoE.

Put someone at the table whose only job is to protect the transaction.

One sentence—

“This is 1.3% of the deal. Sign the paper. Go live your life.”

That sentence was worth $6 million.

And nobody said it.

Don’t be that seller.

Jon (28:55): That is a wrap.

Thanks, Ryan.

Great episode.

We’ll see everybody next week.

That’ll do it for this episode of From Burnt Out to Bought Out.

If anything we talked about today hit home, do us a favor and share this episode with another business owner who needs to hear it.

And if you’re sitting there thinking,

“They’re talking about me.”

Good.

That’s the first step.

Head to the show notes and book a free triage call with our team.

No pitch.

No pressure.

Just a real conversation about where you are and what’s possible.

You can also find us on LinkedIn and at wearesynergysolutions.com.

New episodes drop every week.

Until next time—

Stop running the treadmill and start building something you can actually sell.