Working Capital True-Ups: Experiences and Best Practices

September 15, 2024

by a searcher from University of Florida - Warrington College of Business Administration in Miami, FL, USA

Hey everyone,
I'm looking into working capital true-ups and would love some input from the community!

What are your experiences around true-ups and how to navigate them? How does the true-up process typically work? What are some common challenges or pitfalls to be aware of?

Thanks and appreciate your input!

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Reply by a searcher
from Columbia University in London, UK

Thanks ^redacted‌. I would echo comments above. We look to tie-down the calculations early in the process. Firstly, so we understand any volatility and are confident we have the necessary headroom in the cashflows - for example this will partly drive our any prepayment 'holiday' discussions with the Lender. Secondly, so there is no gap in expectations come closing. For good order, as the deal advances we update the numbers monthly and share them with the sellers so there is plenty of opportunity for debate/negotiate pre-closing, We always insist on a protracted amount of time to finalise the completion accounts. This buys us time to fully go into the accounts and treble check that everything as it should be, whilst not being a major distraction from focusing on immediate operations. If we can pay earlier then we will. ... but ultimately, we stick to the pre-defined calculations and process.

Reply by an intermediary
from The Johns Hopkins University in Gainesville, FL, USA

Working capital true-ups are critical post-transaction activities that ensure a fair transfer of resources. The key is to define, IN ADVANCE, what that working capital true-up will look like. The formula and timetable for adjustments should be included in the definitive purchase agreement. Components may include A/R, A/P, WIP, bad debt, et al., depending on your industry and business particulars. Note that not all business transactions include a transfer of working capital, in which case a true-up may or may not be needed. Smaller transactions and main street transactions are less likely to include working capital transfers, and less sophisticated business owners are less likely to understand why cash in "their" account should be included as an asset in the deal. Competent brokers know which deals are likely to need working capital transfers and educate their clients to that effect.

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