Working Capital As A Purchase Price Adjustment Tool

Working capital adjustments were originally designed to ensure that enough cash remains in an acquired business to allow it to operate in the ordinary course post-closing without requiring a capital infusion by the new parent or shareholder(s), or to compensate the purchaser or vendor in the event that there is too little or too much cash, respectively, in comparison with what is needed to support the business' ordinary course operations. This is typically accomplished by specifying a working capital "peg" (an estimate calculated based on normalized historical averages) as of the closing date. Within a 60 or 90 day period after closing, the actual normalized working capital as of the closing date is calculated and compared against the peg, and the purchase price is typically adjusted up or down accordingly.