Ask a Canadian business owner mid-sale what they are negotiating and they will tell you the price. Ask them to explain the working capital schedule attached to the purchase agreement and a meaningful proportion cannot, which is a problem, because that schedule is more likely to change what they actually receive than almost anything else in the document.
Key Takeaway
The 2024 ABA M&A Committee Private Target Deal Points Study identified working capital disputes as the most frequent post-closing claim category, exceeding reps-and-warranties claims, indemnity claims and earnout disputes combined. Houlihan Lokey data for 2024 puts the median absolute true-up in middle-market deals at roughly 1.4% of purchase price, with approximately 60% of true-ups favouring the buyer. The mechanism works by comparing a negotiated target level of net working capital, the "peg," against actual working capital at closing, with the difference adjusting the price dollar for dollar. The structural problem is that the peg is typically derived from historical financials or a quality of earnings analysis, while closing working capital is prepared under the bespoke accounting definitions written into the purchase agreement. When those two foundations differ, the comparison is not like for like, and the gap becomes a payment.
The Two Numbers That Should Alarm You
Start with the evidence, because it reframes how much attention this deserves relative to the rest of a transaction.
The 2024 ABA M&A Committee Private Target Deal Points Study identified working-capital disputes as the most frequent post-closing claim category, beating reps-and-warranties claims, indemnity claims, and earn-out disputes combined[1].
Consider what that displaces. Sellers and their counsel spend enormous energy on representations and warranties, on indemnity caps and baskets, on survival periods. Those matter. But the single most likely mechanism by which a post-closing dispute arises is the working capital true-up, and it typically receives a fraction of the negotiating attention.
The second figure quantifies the stakes. Houlihan Lokey post-close adjustment data for 2024 shows the median absolute true-up in middle-market deals, enterprise value $50 million to $500 million, is approximately 1.4% of purchase price, and roughly 60% of true-ups favour the buyer[1].
A median is not a maximum, and 1.4% on a mid-market transaction is a meaningful sum. But the more striking number is the 60%. If the mechanism were a neutral reconciliation of an unknowable closing position, outcomes should distribute roughly evenly. They do not, and the reasons are structural rather than accidental, which is the subject of a later section.
Why The Mechanism Exists At All
Before criticizing it, the case for it, which is entirely sound.
Without a working capital adjustment, a seller could strip cash out of the business, collect receivables early, defer payments to vendors, and pocket the proceeds, leaving the buyer to close on a shell of the business they underwrote[2]. The adjustment prevents that by anchoring the closing balance sheet to a negotiated target and reconciling the actual position against it after the fact[2].
The underlying principle is that when a buyer acquires a business they expect to receive a normal level of working capital necessary to operate the company without immediately injecting additional funds; if the seller delivers less, the buyer receives a business requiring immediate cash investment, and if the seller delivers excess, the buyer receives a bonus they did not pay for[3].
This is fair and both sides benefit from it. A seller with an unusually strong receivables position at closing gets paid for it. The mechanism is not a trap by design. It becomes one through the definitional details, which is a different problem and a solvable one.
What The Peg Actually Is
The target, sometimes called the peg or reference NWC, represents the agreed level of working capital the seller commits to deliver at closing[3]. It is set by negotiation and typically reflects the average working capital level over the trailing twelve to twenty-four months[2], though Lincoln International notes targets are often calculated using a three-to-twelve-month historical average[4], and the choice of window is itself negotiable and consequential.
The arithmetic is simple: the purchase price adjustment equals actual closing net working capital minus the target, so if actual exceeds the peg there is a surplus and the buyer pays the seller the difference, increasing proceeds[5]. If actual falls short, the seller pays the buyer[3].
The stated purpose is that the peg is the target amount of cash needed to run the business post-sale, ensuring the buyer does not have to inject extra funds immediately[5].
Two things follow that sellers frequently miss. The averaging window determines the number, and a longer window smooths seasonal peaks while a shorter one can anchor to a recent high or low. And a peg set high relative to how the business actually operates is a permanent transfer of value to the buyer, because the seller must fund working capital up to a level the business never genuinely required.
The Timeline, Step By Step
The sequence is standardized enough to set out precisely, and knowing it tells a seller when their leverage exists.
Step one, three to five business days before closing. The seller prepares and delivers an estimate of closing NWC, closing cash, closing indebtedness and closing transaction expenses, calculated using the methodology agreed in the purchase agreement's working capital schedule; the seller's estimate becomes the basis for the estimated adjustment paid at close[1].
Step two, at closing. The buyer wires the base purchase price plus or minus the estimated NWC adjustment, plus closing cash, minus closing indebtedness, minus closing transaction expenses[1].
Step three, after closing. The buyer prepares and delivers a closing statement to the seller within a defined period. Lincoln International describes this as often 90 to 120 days[6], while other commentary puts the true-up window at 60 to 90 days post-closing[2]. The variation reflects genuine differences between agreements, and the specific period in your agreement is a negotiated term.
Step four, review and dispute. The seller has a defined window to object, after which unresolved items typically go to an independent accountant whose determination is usually final and binding[1].
Note where the drafting advantage sits. The seller prepares the pre-closing estimate; the buyer prepares the post-closing statement. The estimate determines cash at closing, but the buyer's statement determines the final answer, and it is prepared after the seller has lost day-to-day access to the business.
The Foundational Mismatch
This is the central technical insight of the entire subject, and Lincoln International states it more clearly than anyone.
While the target NWC is typically derived from management's historical financials or a quality of earnings analysis, the closing NWC is prepared under the bespoke accounting rules of the purchase agreement, and when these foundations differ, results are unlikely to align, leaving buyers and sellers wondering why there was a greater than expected post-close purchase price adjustment[4].
Read that carefully, because it describes a comparison of two things measured differently. The peg was built from how the business historically kept its books. The closing statement is built from definitions negotiated into the agreement, which may include or exclude items the historical financials treated otherwise, apply different reserve methodologies, or define "current liabilities" more broadly.
The consequence is that a true-up can produce a large adjustment even where nothing about the business changed between the peg period and closing. The gap is not economic; it is definitional. And because it is definitional, it is entirely preventable at drafting and almost impossible to fix afterward.
This is why "same methodology" or "like-for-like" language in a purchase agreement is worth more attention than its length suggests. A provision requiring the closing statement to be prepared using the same accounting methods, practices and estimation techniques used to construct the peg is the single most protective sentence available to a seller, and its absence is where the 60% figure starts to make sense.
The Sales Tax Example, Which Is Very Canadian
Lincoln International's illustration of the mismatch is worth quoting in substance because it maps onto a distinctly Canadian exposure.
In their example, sales-tax liabilities were excluded from the target NWC. At closing, the buyer recorded the liability under the purchase agreement's broad definition of current liabilities, reducing the closing NWC. The seller argued the target should be revised for comparability; the buyer countered that the target was fixed and this liability could only be trued up through the closing NWC, resulting in a downward purchase price adjustment and a dispute over contractual mechanics[4].
The structure of that trap is worth naming. An item is left out of the peg, then captured by the closing definition, and the asymmetry becomes a payment. The seller's argument, that the two sides of the comparison should be measured consistently, is intuitively correct and contractually weak if the agreement does not say so.
For a Canadian business the sales tax version of this is unusually live. A company selling across provinces carries GST/HST, and potentially QST, PST in British Columbia, Saskatchewan and Manitoba, each with its own registration, collection and remittance position. Those balances fluctuate with the filing cycle, and a closing date falling shortly before a remittance is due produces a materially different current liability than one falling shortly after. A seller who has not confirmed how indirect tax balances are treated in both the peg and the closing definition has left a variable on the table that they cannot control and the buyer can observe.
Seasonality, And Why Closing Date Matters
A second structural mismatch, and one that disproportionately affects Canadian businesses in construction, agriculture, tourism and retail.
Lincoln International notes that the target NWC is often calculated using a three-to-twelve-month historical average, while the transaction may be expected to close at a seasonal high or low point in NWC[4].
A seasonal business measured on an annual average and closed at its seasonal peak delivers working capital above the peg, which produces a payment to the seller. Closed at its trough, the same business delivers below the peg and the seller pays. Neither outcome reflects anything about the business's value or the seller's conduct; both reflect the calendar.
This is manageable but only in advance. The available responses are to negotiate a seasonally-adjusted peg, to negotiate a peg calculated on the same point in the prior year's cycle, or to influence the closing date. A seller in a strongly seasonal industry who accepts a flat trailing-twelve-month peg without examining where closing falls in the cycle has accepted a coin flip on a six-figure sum, and Lincoln recommends documenting whether the target NWC included seasonal adjustments[4].
Deferred Revenue And The Usual Suspects
Certain line items generate disputes far out of proportion to their frequency, and knowing them lets a seller pre-empt the argument.
Deferred revenue, cash received for goods or services not yet delivered, sits as a liability on the balance sheet and is a frequent point of contention in NWC negotiations[5]. The dispute is structural: a buyer argues deferred revenue is a real obligation to perform and belongs in current liabilities, reducing NWC; a seller argues the cash was already collected and the associated cost of delivery is a fraction of the deferred amount, so full inclusion overstates the burden.
Other recurring flashpoints identified in the commentary include whether an inventory obsolescence reserve was booked under the "same methodology" used to set the peg, and whether a customer deposit booked shortly before close is deferred revenue or pre-paid services[1]. Both illustrate the same pattern: a judgment-dependent balance where the buyer's post-closing view differs from the seller's historical practice.
The practical instruction is to identify every judgment-dependent balance in your business, reserves, accruals, deposits, deferred amounts, warranty provisions, and specify its treatment explicitly in the working capital schedule rather than relying on a general methodology clause to resolve it later.
The Collar
A negotiated feature that eliminates small disputes and is underused in smaller Canadian transactions.
A tolerance band, or collar, is a negotiated range around the peg, used to avoid disputes over immaterial deviations. The illustration given: assume a $2 million peg and a plus-or-minus $50,000 collar; if actual NWC is $2,030,000 no adjustment occurs, but if actual NWC is $2,060,000 the buyer pays the seller the full $60,000[5].
Note the mechanics in that example: once the collar is breached, the payment is the full deviation rather than only the excess beyond the band. That is one of two possible constructions, and which one your agreement uses materially changes outcomes near the boundary. A collar that pays only the excess above the band is a different instrument from one that pays the whole amount once triggered, and the difference should be understood rather than assumed.
For smaller transactions the collar is particularly valuable, because the cost of a dispute, professional fees for both sides plus an independent accountant, can approach or exceed the amount in dispute. A band sized to make small disagreements uneconomic to pursue is often worth more than the value it forgoes.
The Alternative: Locked Box
North American practice is not the only option, and the alternative is gaining ground.
The true-up is the hallmark of the completion accounts mechanism, common in North America, under which the purchase price is adjusted post-closing based on a balance sheet prepared as of the closing date. The alternative, the locked box, is prevalent in Europe and gaining traction elsewhere, and fixes the price based on a historical balance sheet with the seller indemnifying the buyer for any value leakage until closing[5]. Completion accounts provide high accuracy because the adjustment reflects the actual financial position at closing, but can lead to lengthy and costly post-closing disputes[5].
The trade-off is precision against certainty. A locked box gives a seller a known number at signing and eliminates the post-closing true-up entirely, at the cost of accepting a leakage covenant and a price fixed to a date before closing. For a seller whose priority is a clean exit with no contingent exposure, and this describes a great many retiring Canadian owners, that trade may be attractive.
It is worth raising the option even where the buyer expects completion accounts. A seller who does not know locked box exists cannot ask for it, and asking costs nothing.
The Asymmetry Nobody Explains To Sellers
Returning to the 60% figure, with an explanation that is our own analysis rather than a finding in the sources.
If the true-up were a neutral reconciliation, outcomes would cluster around even. Several structural features push against that.
The buyer prepares the closing statement. The party computing the number chooses, within the agreement's constraints, how judgment-dependent balances are struck. Reserves, allowances and accruals all involve estimation, and estimation prepared by the party who benefits from a lower number tends toward a lower number without anyone acting improperly.
The buyer controls the records. By the time the closing statement is prepared, the seller no longer has day-to-day access to the accounting system, the staff, or the underlying documentation. Challenging a reserve requires evidence the challenger no longer holds.
The seller has moved on. A retired owner facing a $180,000 proposed adjustment, a defined objection window, and the prospect of professional fees and an independent accountant's costs is making a very different calculation from a buyer with a finance team already on the file.
The peg is negotiated when sellers are least advised. The working capital target is frequently settled at letter of intent stage, when the seller's attention is on headline price and their advisory team may not yet include transaction accounting expertise. One advisory source puts it bluntly, if with evident commercial interest, that getting the peg definition, calculation methodology and target wrong at LOI stage can cost 5 to 15% of headline price without the seller ever knowing why[7].
None of this requires bad faith. It describes an information and incentive gradient, and gradients produce consistent directional outcomes.
The Canadian Wrinkle: ASPE Versus IFRS
A point specific to Canadian transactions that the general M&A literature does not address.
Most Canadian private companies report under Accounting Standards for Private Enterprises rather than IFRS. Where a buyer is a public company, a foreign strategic, or a private equity sponsor reporting under IFRS or US GAAP, the peg derived from the target's ASPE financial statements and the closing statement prepared to the buyer's expectations can rest on genuinely different measurement bases.
Areas where the frameworks diverge in ways that touch current assets and liabilities are worth specific attention with your accountant, and this article deliberately does not attempt to enumerate them, because the analysis is engagement-specific and getting it wrong in a summary would be worse than not attempting it. The transferable point is procedural: if the buyer's reporting framework differs from yours, ask explicitly which framework governs the closing statement, and ensure the peg was constructed on the same basis.
This connects directly to the foundational mismatch discussed above. A framework difference is simply a large, systematic version of the same problem, and it is entirely foreseeable at the point the parties are identified.
A Worked Case: The Reserve That Appeared
A Canadian distribution business sold to a strategic buyer. The reconstruction below illustrates the mechanism rather than reporting a specific engagement.
The peg was set at approximately $4.2 million, derived from a trailing twelve-month average taken from the company's ASPE financial statements. The seller's pre-closing estimate showed closing NWC slightly above the peg, and a modest estimated adjustment was paid at closing. The seller considered the matter finished.
The buyer's closing statement, delivered roughly 100 days later, showed closing NWC approximately $340,000 below the peg. Three items accounted for most of the difference. An inventory obsolescence reserve had been increased on the buyer's assessment of slow-moving stock, applying a methodology the seller had never used. An accrual for unbilled supplier costs appeared that the seller's historical practice had recorded on invoice receipt. And a provincial sales tax balance was classified as a current liability in a manner the peg period had not reflected.
Nothing here required anyone to act improperly. Each item was arguable. But the agreement's methodology clause said only that the closing statement would be prepared "in accordance with generally accepted accounting principles," which resolved nothing, because both treatments were defensible under a broad principles reference. Absent language tying the closing statement to the specific methods, practices and estimation techniques used to build the peg, the seller's comparability argument had no contractual anchor.
The seller disputed, incurred fees, and settled for roughly half. The entire exposure was created by one sentence that was not in the agreement and would have cost nothing to include.
What To Negotiate, And When
Raise working capital at LOI, not at definitive agreement. The peg methodology is frequently settled early and treated as agreed thereafter. Bring transaction accounting input to the LOI stage even though it feels premature.
Insist on same-methodology language, specifically. Not "in accordance with GAAP," which resolves nothing, but a clause requiring the closing statement to be prepared using the same accounting methods, practices, policies, procedures, classifications and estimation techniques used in constructing the peg, with the peg's supporting schedule attached.
Attach a line-by-line sample calculation. A worked example of the peg calculation, appended to the agreement, converts a definitional argument into an arithmetic one.
Enumerate the judgment items explicitly. Inventory reserves, allowance for doubtful accounts, warranty provisions, deferred revenue, customer deposits, accrued but unbilled costs, and indirect tax balances. Name each and state its treatment.
Address seasonality if you have any. Either a seasonally-adjusted peg, a same-point-prior-year comparison, or an agreed closing window.
Negotiate the collar and understand which construction applies. Full deviation on breach versus excess above the band produce different outcomes near the boundary.
Preserve your access to records. Negotiate a post-closing right of access to books, records and personnel sufficient to review the closing statement, since the objection window is worthless without the evidence to use it.
Ask about locked box. Particularly if certainty matters more to you than precision.
The Limits Of This Analysis
Several caveats matter. This article draws on transaction advisory commentary and deal points study data reported in secondary sources rather than the underlying ABA and Houlihan Lokey publications, which we did not obtain directly; the 1.4% median, the 60% buyer-favouring figure and the characterization of the ABA study's findings should be verified against those primary sources before being relied upon. Sources differ on standard timing windows, with the closing statement period reported variously as 60 to 90 and 90 to 120 days, reflecting genuine variation between agreements. Several cited sources are M&A advisory firms or brokers with a commercial interest in sellers engaging professional support, including one whose 5 to 15% claim we report with that caveat attached. The asymmetry explanation in this article is our own analysis rather than a sourced finding. The discussion of ASPE and IFRS divergence is deliberately general and is not a technical accounting comparison. Purchase agreement drafting is jurisdiction- and deal-specific; nothing here is legal, accounting or transaction advice, and any seller should engage Canadian transaction counsel and a transaction accounting advisor before agreeing a peg.
Frequently Asked Questions
What is a working capital peg?
How common are disputes about it?
Why do true-ups tend to favour buyers?
What is the single most protective clause for a seller?
Does seasonality affect this?
Is there an alternative to the post-closing true-up?
References
- CT Acquisitions. (2026, June 23). Net Working Capital Adjustment: 2026 M&A Peg Calculation, True-Up Process, And Dispute Avoidance, reporting the 2024 ABA M&A Committee Private Target Deal Points Study finding and 2024 Houlihan Lokey post-close adjustment data, and setting out the step-by-step true-up timeline. Note: published by an M&A advisory firm. ctacquisitions.com/net-working-capital-adjustment
- Acquisition Stars. (2026, June 17). Working Capital Adjustment At Closing: How It Works And Why It Matters, on the anti-stripping rationale, the trailing twelve-to-twenty-four-month peg convention and the 60-to-90-day true-up window. acquisitionstars.com/blog/working-capital-adjustment-closing
- IB Interview Questions. (2026, February 23). Net Working Capital Adjustments In M&A Deals Explained, on the underlying principle and dollar-for-dollar adjustment mechanics. ibinterviewquestions.com/blog/net-working-capital-adjustments-ma
- Lincoln International. (2026, May 12). Bridging The Gap Between Target And Closing Net Working Capital In M&A Deals, on the foundational mismatch between peg derivation and closing statement preparation, the sales-tax liability example, and seasonality. lincolninternational.com/perspectives/articles/bridging-the-gap-between-target-and-closing-net-working-capital
- Valutico. (2025, September 27). Working Capital Adjustment In M&A: A Definitive Guide, on the adjustment formula, the collar illustration, deferred revenue, and the completion accounts versus locked box comparison. valutico.com/working-capital-adjustment-in-ma-a-definitive-guide
- Lincoln International. (2026, March 26). Working Capital Adjustments And Tips To Mitigate M&A Disputes, on the four phases of the post-close process and the 90-to-120-day closing statement period. lincolninternational.com/perspectives/articles/working-capital-adjustments-and-tips-to-mitigate-ma-disputes
- CT Acquisitions. (2026, July 5). Working Capital Adjustment In M&A Deals (2026), containing the claim that errors at LOI stage can cost 5 to 15% of headline price. Note: published by an M&A advisory firm with a commercial interest in sellers engaging advisors. ctacquisitions.com/unlock-hidden-business-value-curated-ma-deals-for-working-capital
This article discusses M&A purchase price adjustment mechanics and is provided for general informational purposes. It is not legal, accounting or transaction advice. Study data is reported from secondary sources and should be verified against the underlying publications. Purchase agreement drafting is deal-specific; engage Canadian transaction counsel and a transaction accounting advisor before agreeing a working capital target.