Every purchase price adjustment attorney in Caldwell has watched the same thing happen: a deal signed on an agreed number closes on a different one, because a working capital clause nobody argued about turned out to say something specific. The peg, the true-up and the dispute route decide that difference.
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Quick answer
A working capital adjustment compares the current assets and liabilities delivered at closing against an agreed target. Deliver less and the price falls; deliver more and it rises. The target, the accounting rules used to measure it, and the procedure for disagreeing are negotiated well before anyone calculates anything.
A Caldwell processor signs at a headline price in March and closes in June. Between those dates the company builds inventory, ships against contracts and collects receivables, and the balance sheet looks nothing like it did when the number was agreed. The working capital adjustment exists to make sure the buyer receives the operating assets it assumed it was buying, and to pay the seller for anything above that.
The mechanism is simple in outline and unforgiving in detail. The parties agree a target, measure the actual position at closing, and settle the difference in cash. Everything contentious lives in how the measurement is defined and who gets to make it.
For agricultural processing and food manufacturing companies, the complication is that there is no such thing as a normal balance sheet date. A target lifted from a single month can hand either side a windfall that has nothing to do with how the business performed.
The target level of current assets less current liabilities that the seller agrees to deliver at closing. Actual working capital above the peg increases the price paid; a shortfall reduces it, dollar for dollar.
Working capital terms usually arrive late in a negotiation, when both sides want to sign. The peg gets taken from a recent month, the principles clause is accepted as drafted, and nobody models what the number would have been in a different season.
Running the proposed definition against two or three years of month-end balance sheets shows immediately whether the target is fair at the expected closing date. The exercise takes a day and routinely moves the number.
When the peg reflects the company’s actual cycle and the principles clause is specific, the post-closing statement produces a modest adjustment both sides expected. The dispute procedure stays unused, which is what a well-drafted one is for.
Purchase price is generally negotiated on a cash-free, debt-free basis, which assumes the business comes with enough inventory, receivables and payables balance to keep running. The peg converts that assumption into a number.
Without one, a seller could collect every receivable, run inventory down and stretch payables before closing, handing the buyer an operating business with nothing to operate on. The adjustment removes the incentive by making any such shift a pure price change.
That is also why the peg is not a performance measure. It is a delivery specification, and arguments about whether the business had a good quarter belong somewhere else in the agreement.
A Caldwell food or beverage manufacturer carries very different working capital in February than it does at the end of a pack run. Raw material purchasing, finished goods inventory and receivables all move on the same cycle, which means a single month-end figure describes one point on a curve rather than a normal state.
Several approaches deal with that properly, and the right one depends on how predictable the cycle is and how firm the closing date is.
Nobody knows the closing balance sheet on the closing date, so the agreement works in two passes. The seller delivers an estimate shortly beforehand, the money that moves at closing reflects that estimate, and the real calculation follows afterward.
The second pass is where the discipline is required, because it runs on deadlines that operate whether or not anyone is paying attention.
The buyer almost always prepares it, which means the buyer controls the first version of the number and the seller is responding. A seller should negotiate access to the books and the supporting work papers, not merely the right to receive a statement.
The period for objecting is short and absolute. A seller who misses it is generally treated as having accepted the buyer’s calculation in full, which is the single most avoidable loss in this part of the agreement.
A shortfall is commonly paid from a dedicated adjustment escrow held for exactly this purpose, released once the statement is final. If no such fund exists, the buyer is chasing a seller who has already distributed the proceeds.
Most adjustment disputes are not about arithmetic. They are about whether an inventory reserve should have been taken, whether slow-moving finished goods are still worth their carrying value, whether a receivable is collectible, and whether an accrual belongs in the period.
The clause that governs those questions usually says the statement will be prepared in accordance with generally accepted accounting principles applied consistently with the company’s past practice. That sentence contains its own conflict, because past practice in a closely held company is frequently not what the principles would require.
The workable fix is to state the hierarchy explicitly, list the specific conventions that apply to the items most likely to move, and attach a sample calculation showing the peg computed under those rules. A sample statement settles more future arguments than another paragraph of definitions.
The standard route sends unresolved items to an independent accounting firm acting as an expert rather than as an arbitrator. Its determination is normally final and binding, which is a feature until the parties discover how little room it leaves.
Four terms decide how that process behaves: whether the firm may only choose between the two positions presented or may reach its own figure, whether its scope is limited to items actually disputed, how the cost of the determination is allocated between the parties, and how long the firm has to decide.
Under an Idaho-governed purchase agreement these provisions are enforced as the parties drafted them, so the procedure is worth reading closely while it is still a hypothetical rather than a live disagreement.
The firm’s contribution here is specific: test the proposed peg against the company’s own history, tighten the accounting principles clause around the items that will actually move, and make the objection and dispute procedures something a seller can realistically use.
Lee Clark negotiates these terms for Caldwell buyers and sellers, working alongside the accountants who build the model. The work happens before signing, because after closing the clause says what it says.
| Stage | Who controls it | What commonly goes wrong |
|---|---|---|
| Setting the peg | Both parties, before signing | A target lifted from one month that misrepresents a seasonal business |
| Estimated closing statement | The seller, shortly before closing | An optimistic estimate that guarantees a true-up in the buyer’s favor |
| Final statement | The buyer, after closing | New reserves and write-downs applied under a vague principles clause |
| Objection and resolution | The seller, then an independent accountant | The objection window expires, or the expert’s scope and cost split were never defined |
Is the working capital clause in your deal doing what you think?
Book Your Free Legal-Strategy CallThe bottom line
Model the proposed peg against two or three years of your own month-end balance sheets before agreeing it, and make the accounting principles clause specific enough to settle the inventory question in advance. Then diary the objection window the day you close.
A working capital adjustment compares the current assets and liabilities actually delivered at closing against an agreed target, raising the price where the business delivers more and reducing it where it delivers less.
The target is normally built from historical month-end balance sheets using a defined measure of current assets and liabilities, with the averaging period and any excluded items negotiated before signing.
Companies whose inventory and receivables move with a pack or harvest cycle have no normal balance sheet date, so a target taken from a single month can hand either party a windfall.
The buyer prepares the post-closing calculation in most agreements, which puts the seller in the position of responding and makes access to the underlying books and work papers a negotiated right.
Missing the objection window generally means the buyer’s calculation becomes final and binding in full, making the diary entry on the closing date one of the more valuable things a seller does.
Adjustment disputes usually turn on reserves, inventory valuation and accrual timing rather than arithmetic, and the principles clause decides which rules govern each of those judgments.
Language requiring generally accepted principles applied consistently with past practice contains a built-in conflict, because a closely held company’s historical treatment often departs from what those principles require.
Unresolved items are normally referred to an independent accounting firm acting as an expert, whose determination is final and binding within whatever scope the purchase agreement gives it.
Allocation of the determination cost is set by the agreement, with common approaches splitting it evenly, assigning it to the losing party, or apportioning it according to how the disputed amounts were decided.
Clark Meyers PC negotiates purchase price adjustment terms for Caldwell companies from the firm’s Idaho office in Nampa, situated within Canyon County just as Caldwell is. No Caldwell office is maintained.
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