What a working capital adjustment is
Most purchase agreements set a target level of working capital (current assets minus current liabilities) the business is expected to have at closing. If actual closing working capital comes in above that target, the seller typically receives an additional payment; if it comes in below, the buyer deducts the shortfall from the purchase price. This "true-up" is standard in most M&A deals, but the mechanics of how it's calculated are where disputes originate.
The headline price in your LOI is not the price you'll actually receive at closing. It's the price before the working capital true-up, which can move the final number by a meaningful amount in either direction.
The "peg" and why it matters
The target working capital figure, often called the "peg", is typically negotiated based on a trailing average of the business's historical working capital. Sellers benefit from a peg that reflects genuinely normal operations; buyers benefit from a peg calculated in a way that maximizes the odds of a post-closing adjustment in their favor. Small differences in accounting methodology (how inventory is valued, whether certain reserves are included) can shift the peg significantly.
A real $2 billion dispute
When Chicago Bridge & Iron (CB&I) sold its nuclear construction business to Westinghouse Electric in 2015, the purchase agreement included a standard post-closing working capital "true-up." CB&I calculated it was owed roughly $428 million; Westinghouse calculated the opposite direction entirely, claiming CB&I instead owed it approximately $2 billion. View CB&I's SEC filing on the dispute ↗
The dispute went all the way to the Delaware Supreme Court, which ultimately ruled largely in CB&I's favor, finding the purchase agreement limited the true-up to a narrower set of items than Westinghouse claimed. View coverage of the ruling ↗ The gap between the two sides' calculations (roughly $2.4 billion apart on what was supposed to be a mechanical, formula-driven adjustment) illustrates how much is genuinely at stake in language that often gets far less negotiating attention than the headline purchase price.
How sellers can avoid surprises
- →Negotiate the working capital definition and calculation methodology in detail, not just the target number. This is where later disputes actually originate.
- →Understand exactly which balance-sheet line items are included and excluded before you sign the purchase agreement, not after a dispute arises.
- →Specify a clear, time-bound dispute resolution process (commonly a neutral independent accountant) rather than leaving disagreements to open-ended negotiation or litigation.
- →Have your advisor model out the true-up against several scenarios before closing, not just the headline price.