The fight over a working capital adjustment is rarely about whether the business changed hands. It is about which accounting rulebook decides what the numbers actually say.
Key takeaways
STEP 01 OF 12
A working capital adjustment only exists in a completion-accounts deal, where the purchase price is trued up against a balance sheet prepared as of the closing date. A locked-box deal instead fixes the price against a balance sheet from before signing and shifts the economic risk of the interim period to the buyer through other mechanisms entirely — there is no post-closing true-up to settle at all. See the completion accounts and locked-box mechanism glossary entries if the deal's own mechanism is not immediately obvious from the agreement — confirm this before assuming an adjustment is even coming.
STEP 02 OF 12
Treadstone Law's own experience with these disputes is blunt on this point: “the fights are about accounting policy: whether a receivable is collectible, how inventory is valued, whether an accrual should have been booked” — see post-closing integration and disputes. Two accountants working from the same trial balance can reach genuinely different closing numbers if the agreement never specified which policy governs a judgment call like AR collectibility. That is the gap almost every dispute lives in.
STEP 03 OF 12
The two clauses that decide most of the money at stake: which specific accounting policies apply to the closing statement, and which one prevails when those specified policies conflict with GAAP. Treadstone Law's advice is to “say so expressly, because that conflict is where most true-up money is won and lost” — the same source as above. An agreement that simply says “prepared in accordance with GAAP” without naming the target's own historical practices leaves exactly the judgment calls in step two unresolved.
STEP 04 OF 12
The net working capital peg — the number the closing balance sheet is measured against — should be agreed and stated in the purchase agreement, not derived afterward from whatever the seller's books happen to show. See the net working capital peg glossary entry. Build the peg from a genuine historical average of the target's normal operating cycle, not from a single favourable month either side might otherwise be tempted to select.
STEP 05 OF 12
Whether a receivable should be treated as collectible is exactly the kind of policy judgment step two describes, and it has a tax dimension worth knowing on top of the accounting one: a bad debt is only deductible for tax purposes where it was “established by the taxpayer to have become a bad debt in the year” and had previously been included in income — see ITA s.20(1)(p). That distinction matters in a true-up negotiation: a receivable the seller wants counted at full value in the closing statement may be one the seller's own tax filings never fully supported as collectible in the first place.
STEP 06 OF 12
Whoever is contractually responsible for preparing the first draft — typically the buyer, since it now controls the business's books post-closing — should build it strictly against the agreed policies, not against whichever treatment produces the more favourable number. A closing statement that quietly departs from the agreed policy invites exactly the dispute the agreement was meant to prevent, and it is the first thing an independent accountant will be asked to compare against the contract language.
STEP 07 OF 12
The standard mechanism: one party prepares the closing statement within a contractual deadline, “the other has a set period to object in writing with reasons, and unresolved items go to an independent accountant acting as expert rather than an arbitrator” — the same treadstonelaw source as step two. Missing the objection window typically means accepting the other side's closing statement as final, whatever it says — calendar the deadline the moment closing happens, not when a dispute first looks likely.
STEP 08 OF 12
Where the deal carries real risk of a downward adjustment — a target with volatile receivables or inventory, for instance — an escrow or holdback sized to cover a reasonably foreseeable negative true-up protects the buyer without requiring a separate collection action against a seller who may no longer be easy to reach. See escrow and holdbacks in a sale for how the release mechanics typically work alongside a true-up clause specifically, not just an indemnity claim generally.
STEP 09 OF 12
Treadstone Law's practical advice, worth taking seriously before a dispute escalates: “get both accountants and both principals in a room without prejudice. Most of these settle there.” The independent-accountant process exists as a backstop, and it is a good one, but it costs both time and its own fees — a direct conversation between the two sides' own accountants often resolves the same policy disagreement faster and for less.
STEP 10 OF 12
A buyer who discovers a genuinely uncollectible receivable can, in principle, pursue it either through the working capital adjustment or through an indemnity claim under the purchase agreement's representations — but not both, on the same dollar. The agreement should state that the true-up and the indemnity regime do not duplicate recovery on the same issue, and that any basket or cap on indemnity claims does not apply to a working capital shortfall settled through its own dedicated mechanism. See the indemnity basket and indemnity cap glossary entries for how those two regimes are meant to interact rather than overlap.
STEP 11 OF 12
Whatever financial package the deal was originally sold on, deavo's own framing of a typical deal report is a useful reminder for a buyer feeling blindsided by a true-up result: “a deal report is not a valuation and is not a guarantee that the numbers will hold up” — see reading a deal report. The working capital adjustment mechanism exists precisely because the pre-signing numbers are an estimate, not a warranty — a true-up that moves the price is the mechanism working as intended, not a sign that something went wrong with the deal.
STEP 12 OF 12
The independent accountant's determination is “usually final and binding with no appeal,” so once it lands, apply the adjustment and release the escrow accordingly without delay — a true-up that is legally final but administratively unresolved for months creates exactly the kind of loose end that complicates everything else about a clean post-closing relationship between buyer and seller.
Leaving the accounting-policy-versus-GAAP conflict unaddressed in the agreement. This single gap is where treadstonelaw says most true-up money is actually won and lost. Name the specific policies and state which one governs when they diverge from GAAP.
Setting the working capital peg from a single favourable month. A peg drawn from an unrepresentative period manufactures a dispute before the closing statement is even prepared. Use a genuine historical average of the normal operating cycle.
Missing the objection deadline because no one calendared it at closing. The window to object to a closing statement is typically short and typically strict — treat it as a closing-day action item, not something to revisit if a number later looks wrong.
Escalating straight to the independent-accountant process without a direct conversation first. Most policy disagreements are genuinely resolvable between the two sides' own accountants without the cost and delay of a formal expert determination.
To illustrate the mechanics only — the figures are a drafting choice for this example, not a benchmark.
Scenario A. The agreed working capital peg is $900,000. The closing statement shows $750,000 — a $150,000 shortfall, entirely explained by $150,000 of accounts receivable the buyer's accountant treated as uncollectible under the agreement's stated policy that AR outstanding over 120 days is excluded from the closing calculation. The seller objects, arguing the receivables were subsequently collected after closing. Because the agreement's policy is explicit — over-120-day AR is excluded regardless of eventual collection — the independent accountant upholds the buyer's closing statement, and the seller owes the $150,000 shortfall against the purchase price.
Scenario B. Same $150,000 gap, different agreement: this one states only that the closing statement is “prepared in accordance with GAAP,” with no specific AR-ageing policy named. The same dispute over the same receivables now turns on a genuine, unresolved question of accounting judgment rather than a contract term either side can simply point to — precisely the expensive, slower fight the explicit policy in Scenario A was written to avoid.
The underlying facts did not change between the two agreements. Only the drafting did — and the drafting is what decided whether the $150,000 question took an afternoon or a formal expert determination to resolve.
Not every working capital adjustment carries the same risk of a fight.
Match the level of drafting detail in the accounting-policy clause to the target's own risk profile, not a generic template.
Typically the buyer, since it controls the business's books after closing, though the agreement should say so explicitly and set the deadline for delivery. The seller then has a contractual window to object.
Generally no — that is the point of using an expert-determination clause rather than arbitration. The accountant's decision is usually final and binding on both sides once issued.
No — a locked-box structure fixes the price against a pre-signing balance sheet and allocates interim-period risk through other mechanisms, such as a locked-box interest or leakage protection, rather than a post-closing adjustment.
A short call can walk through where these disputes actually start.
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