Beware the Working Capital Adjustment Trap

Stanley Veliotis, , PhD, JD/LLM, CPA, and Mauro Viskovic, , JD

Here is a familiar story: An entrepreneur works for decades to build a successful business and has reached the point of successfully exiting from the business through a lucrative sale transaction. At the closing of the sale, the buyer pays the seller a substantial sum for the business. A bombshell arrives 90 days later, however, in the form of a demand to repay a large portion of the purchase price back to the buyer due to a “working capital adjustment.” What happened? The answer is that the seller was a victim of the working capital adjustment trap. To explain how easy it is for an unsuspecting seller to fall into that trap, it is first necessary to provide some background describing the nature of and rationale for working capital adjustments in business acquisition transactions.