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The number that quietly reshapes your sale price
Working capital is one of the most misunderstood elements in private M&A transactions, and one of the most consequential. In a market where post-close purchase price disputes remain among the most common sources of friction between buyers and sellers, getting working capital right is not optional. It is foundational.
Yet in our experience advising mid-market business owners through sale processes, we find that many sellers enter negotiations without a clear understanding of how working capital will be defined, measured, or adjusted at completion. The result? Value is transferred from seller to buyer, often without the seller fully realising it happened.
This paper breaks down how working capital operates in the context of an M&A transaction, where the common traps lie, and what SME owners can do to protect their position before and during a deal.
Why working capital demands attention in 2026
Australia's M&A market is entering 2026 on a constructive footing. PwC's M&A Outlook 2026 found that over half of Australian CEOs are planning major acquisitions in the next three years, with around 40% intending to drive transformation through M&A or partnerships within the next 12 months. Private equity buyout activity rose roughly 28% in volume and 32% in value during 2025, and inbound capital from the US, Japan, and broader Asia continues to flow into mid-market Australian assets.
At the same time, the regulatory environment has shifted. Australia's new mandatory merger notification regime, effective from January 2026, requires ACCC notification and clearance before completion for transactions meeting defined thresholds. From April 2026, additional asset acquisition thresholds and voting power triggers have also come into effect. These changes mean longer planning timelines, more comprehensive documentation, and greater scrutiny of deal mechanics.
For SME owners considering a sale, this environment carries a dual implication. On one hand, buyer appetite is strong and capital is available. On the other, acquirers are more disciplined, more process-driven, and more forensic in their approach to pricing and completion adjustments. Working capital is squarely in their sights.
Business owners, CFOs, and their advisors need to understand this area well before entering a transaction, not after the letter of intent has been signed.
What working capital actually is (and is not)
At its simplest, working capital is the capital required to run the business day to day. Think debtors, inventory, work in progress, and prepayments, less creditors and accrued liabilities.
Most private M&A transactions are structured on a cash-free, debt-free basis, with a "normal" level of working capital assumed at completion. In theory, this is straightforward. In practice, it rarely is.
The real question is not what working capital is as a textbook definition. It is what level of working capital is required for the business to operate on a steady-state basis, and how that level should be calculated, agreed upon, and adjusted.
Understanding this distinction is where sellers either protect their position or unknowingly concede ground.
Reframing the balance sheet through a transaction lens
Statutory balance sheets are designed for financial reporting, not for M&A. When a business enters a sale process, the balance sheet needs to be re-cut into three categories:
Working capital comprises the operating assets and liabilities that cycle through the business in the normal course of trade. This is the pool that will be subject to a target and an adjustment mechanism at completion.
Cash is separated out because most deals are structured on a cash-free basis. However, "cash-free" does not mean zero cash. Most businesses require a minimum level of operational cash to function, covering things such as payroll floats, petty cash, or bank minimums. That minimum operational cash figure is often heavily negotiated and can have a material impact on the seller's net proceeds.
Debt (including debt-like items) is also carved out. Items such as hire purchase liabilities, deferred consideration from prior acquisitions, or employee entitlement provisions may be reclassified as debt depending on the agreed definitions.
This reclassification exercise is where significant value is won or lost. The way items are categorised determines what stays in the price, what reduces it, and what the seller walks away with. Definitions matter enormously.
Agreeing definitions early, not just the number
There is no universal definition of cash, debt, or working capital in M&A. This is where deals can become genuinely contentious, and it is the area where we see the most preventable disputes.
At Morgan Shaw Advisory, we consistently advise clients: the biggest issues in working capital negotiations are not valuation gaps. They are definition gaps.
Common areas of debate include:
Deferred revenue. Should it be classified as debt (reducing the seller's proceeds) or as working capital (netted into the target)? The answer depends on the nature of the revenue and how the buyer intends to treat it post-completion. For a subscription-based business or a firm with significant advance billing, this classification alone can swing the outcome by hundreds of thousands of dollars.
Tax provisions. Current tax liabilities are frequently treated as debt-like items rather than working capital, which pulls them out of the working capital target and directly reduces the seller's net proceeds. This treatment is not automatic, and sellers should understand the implications before agreeing to it.
Deposits and bonds. Are security deposits cash or working capital? The classification affects both the cash-free adjustment and the working capital target. Where these sit in the balance sheet re-cut can meaningfully shift the completion payment.
The working capital target itself is typically based on historical averages, often a trailing 12 to 24 months of monthly data. But averages can be misleading. Seasonality, growth trajectories, and changes in business model can all shift what "normal" looks like. A business that has been growing rapidly may have structurally higher working capital needs than its historical average suggests. A seasonal business that closes in its peak month will present very differently to one that closes in a trough.
Sellers who accept a target without interrogating these dynamics are leaving themselves exposed.
Understanding the adjustment mechanism
At completion, the purchase price is adjusted based on the difference between actual working capital at the closing date and the agreed target:
If actual working capital is above target, the seller receives additional cash. The buyer is getting a business with more operational funding than assumed, and the seller is compensated for that.
If actual working capital is below target, the seller gives value back. The buyer is being delivered a business with less operational funding than expected, and the price is reduced accordingly.
This is a true-up mechanism designed to ensure the business is handed over with the right level of operational funding, regardless of where receivables and payables happen to fall on closing day. It is not a penalty or a bonus. It is a timing correction.
In practice, the mechanics are handled through an estimated closing statement prepared at completion, followed by a final true-up (typically within 60 to 120 days post-close) based on audited closing accounts. If there is a disagreement on the final numbers, most sale and purchase agreements provide for an independent accountant determination.
SRS Acquiom's 2026 working capital study, which analysed over 1,500 private-target acquisitions representing more than US$385 billion in deal value, underscores just how frequently this adjustment becomes contested. Sellers who are not prepared for the post-close review process risk being caught off-guard by buyer claims that effectively reduce their sale proceeds months after the deal has closed.
Why this is not just an accounting exercise
Working capital is often delegated to the accountants on both sides, treated as a mechanical calculation to be sorted out in the back end of the deal. At MSA, we take a different view. Working capital is one of the most commercial levers in any transaction.
Consider the following scenarios:
An owner who does not understand that their deferred revenue will be classified as debt may agree to headline terms that look attractive but deliver materially less at completion. A seller who allows the buyer to set the working capital target without challenge may find that a deliberately conservative peg results in a post-close clawback. A business that collects receivables aggressively in the weeks before closing may inadvertently reduce its actual working capital below target, triggering a downward price adjustment.
Each of these outcomes is avoidable with proper preparation and advisory support. They become unavoidable when working capital is treated as an afterthought.
How MSA helps clients navigate working capital in a transaction
Working capital sits within the broader commercial framework that our EBITDA+ Six Steps to Success™ methodology is designed to address. Specifically:
During the "Evaluate the gap" stage, we analyse the balance sheet through a transaction lens well before the business goes to market. This includes identifying items likely to be reclassified, modelling different working capital target scenarios, and understanding how seasonality or growth patterns affect the calculation.
During the "Information" stage, we prepare financial information in a format that buyers expect, with working capital, cash, and debt clearly delineated. This reduces the scope for definitional disputes later and positions the seller as well prepared and professional.
During the "Deal" stage, we negotiate definitions, targets, and adjustment mechanisms on behalf of our clients. This includes ensuring that the non-binding indicative offer reflects a realistic view of working capital, that the sale and purchase agreement contains balanced provisions, and that the seller understands the financial impact of every commercial concession.
During "Due diligence" and "After the event", we manage the closing statement process and oversee the post-close true-up to ensure the seller's interests are protected through to final settlement.
Five things every seller should do before entering a working capital negotiation
Get your balance sheet re-cut early. Do not wait until a buyer's accountants are in the data room. Understand how your balance sheet will look when divided into working capital, cash, and debt, and identify the items that are likely to be contentious.
Understand your normalised working capital range. Analyse at least 12 to 24 months of monthly data, adjust for seasonality and one-off items, and develop a defensible view of what "normal" looks like for your business.
Identify the classification battlegrounds. Deferred revenue, tax provisions, deposits, employee entitlements, and operational cash minimums are all areas where definitions can swing the outcome. Know where you stand on each before the buyer raises them.
Model the impact on your net proceeds. A headline price of $20 million can deliver very different cash-in-hand outcomes depending on how working capital, cash, and debt are defined and adjusted. Run the scenarios so there are no surprises.
Engage an experienced advisor. Working capital negotiation requires both accounting precision and commercial judgement. The two do not always sit in the same person. An experienced M&A advisor will ensure that technical accuracy serves the seller's commercial objectives, not the other way around.
Start the conversation
Working capital may not be the most glamorous topic in M&A, but it is one of the most consequential. The difference between a well-managed and a poorly managed working capital process can amount to hundreds of thousands of dollars in a mid-market transaction.
At Morgan Shaw Advisory, we help SME owners understand, prepare for, and negotiate every commercial element of a business sale, including the ones that do not make the headlines. If you are considering an exit and want to ensure that nothing is left on the table, we would welcome a confidential conversation.
Book a consultation at morganshawadvisory.com or explore our thought leadership library for further reading on exit strategy, valuation, and deal execution.
Morgan Shaw Advisory is a boutique M&A and strategic advisory firm helping Australian business owners maximise value and navigate successful exits. Learn more about our EBITDA+ Six Steps to Success™ methodology at morganshawadvisory.com.