The Hidden Cost of Working Capital: How Term Sheets and SPAs Shift Your Exit Price

The headline price on a term sheet can look clean. The cash that lands in your account after completion often is not.

That gap usually comes down to working capital. It is the money tied up in day-to-day trading, stock, debtors, creditors, and short-term bills. If the term sheet and Share Purchase Agreement (SPA) treat it badly, the final exit price shifts, and sometimes by a lot more than sellers expect.

What Working Capital Really Means in a Business Sale

In plain English, working capital is the cash cushion a business needs to keep moving. A buyer is not just buying past profit. They are buying a business that has to pay suppliers, collect money from customers, and cover wages, rent, tax, and other short-term bills after completion.

Think of it like fuel in the tank. If there is too little, the business stalls. If there is more than expected, that extra value belongs in the price discussion.

The Basic Formula Buyers Use

The basic formula is simple:

Working capital = current assets minus current liabilities

Current assets are the things that should turn into cash within a year, such as receivables, stock, and sometimes prepaid costs. Current liabilities are the bills that need paying within a year, such as trade payables, VAT, payroll, and other short-term obligations.

A buyer will often look at items like these:

• Receivables, because customers still owe the business money.
• Stock, because goods sitting on shelves are part of the operating base.
• Payables, because suppliers may be carrying part of the business.
• Short-term bills, because they hit cash quickly.

The exact definition changes from deal to deal, which is why the wording matters so much.

Why Buyers Focus on Normal Trading Levels

Buyers want the business handed over with enough liquidity to run without an immediate cash injection. If working capital is weak, the business looks thinner, riskier, and more fragile.

That can change the mood in the room fast. A business with stretched debtors, low stock, or overdue creditors does not feel like a smooth handover. It feels like a rescue project, and buyers price that feeling in.

How Term Sheets Set the Starting Point for the Exit Price

The term sheet is usually the first place the commercial deal gets framed. It is not the final legal document, but it sets the tone for what comes next in the SPA.

That is where working capital language can quietly shape the outcome. If the term sheet is vague, the buyer and seller may agree a headline price without agreeing how that price will be tested later.

If you are still shaping the numbers, business valuation for exit planning should sit next to the term sheet, not after it.

The Working Capital Peg and Why It Matters

The “peg” is the target level of working capital expected at completion. It is usually based on normal historical trading, not on a single lucky month or a bad quarter.

A fair peg matters because it sets the benchmark for the final adjustment. If the peg is too high, the buyer may overpay. If it is too low, the seller gives away value for free.

A sensible peg should reflect how the business really trades. Seasonal businesses, subscription models, and firms with lumpy customer payments all need a peg that matches reality, not wishful thinking.

Common Wording Gaps That Create Disputes

Loose drafting causes more pain than most owners expect. Once the buyer’s lawyers get involved, small wording gaps can turn into money gaps.

The usual trouble spots are easy to spot:

• The definition of working capital does not say what is in or out.
• The term sheet leaves the balance sheet methodology open.
• There is no clear treatment for seasonality, one-off costs, or unusual income.

Those gaps leave room for argument later. And in a sale process, argument usually means delay, stress, and a lower net number.

If the SPA says working capital is a true-up item, the headline price is only the starting line.

How the SPA Turns Working Capital Into a Price Adjustment

The SPA is where the deal gets teeth. Once it is signed, the working capital clause is no longer a loose commercial point. It is part of the legal mechanism that changes what the seller actually receives.

The key question is simple: what was the business worth on the day it changed hands, based on the agreed working capital target?

Structure	When price is fixed	How working capital is handled	Main watch-out
Completion accounts	At completion, then adjusted after closing	Actual working capital is compared with the peg	The seller can face a surprise reduction if balances are weak
Locked box	Price is fixed earlier, often on a historic date	Working capital is still relevant through the drafting, warranties, and leakage rules	The wording still needs to be tight, or disputes creep in

Completion accounts leave more room for a post-completion true-up. Locked box deals aim to lock value earlier, but working capital still matters because the documents must deal with what is included, what is excluded, and what happens between the locked box date and completion.

The takeaway is plain. Different structures change how and when price moves, but neither structure makes working capital irrelevant.

What Happens When Actual Working Capital Misses the Peg

The adjustment is often pound for pound. If actual working capital is below the peg, the seller usually loses value. If it is above the peg, the seller usually gets more.

A simple example makes it obvious:

• Agreed price: £5 million
• Target working capital: £800,000
• Actual working capital at completion: £700,000

That is a £100,000 shortfall, so the final price may fall to £4.9 million.

If actual working capital had been £900,000, the seller could receive £100,000 more. That is why the headline number is not the final story.

The Deal Terms That Move the Final Price

The biggest swings often come from small drafting points. A buyer and seller might agree the same broad economics, then end up on opposite sides of the final adjustment because the fine print is doing the heavy lifting.

Seasonality and Normalised Working Capital

A seasonal business should not be judged on a random month-end balance sheet. A retailer in December, a SaaS business with annual renewals, or a manufacturer with a large stock build all look different across the year.

That is why normalised working capital matters. It strips out unusual spikes, late payments, one-off costs, and other distortions so the peg reflects real trading.

If the business had a large order, a delayed customer payment, or an unusual repair bill, those items should be treated carefully. Otherwise the peg becomes a snapshot, not a fair benchmark.

Debt-Like Items, Cash, and Unusual Liabilities

Not every liability is treated the same way. Some items are included in working capital in one deal and treated as debt-like in another.

That often comes up with tax balances, accruals, deferred income, unpaid bonuses, and short-term borrowing. In SaaS businesses, deferred income can be a hot point because cash has come in before the service is delivered.

The treatment of these items changes the price outcome. If a liability is carved out as debt-like, it may reduce the price separately. If it is folded into working capital, it affects the peg and the true-up instead. Either way, the seller needs to know which bucket each item sits in.

How Sellers Can Protect Value Before Signing

The best time to deal with working capital is before the buyer starts asking awkward questions. Once heads of terms are signed, the room for easy fixes gets smaller.

If a sale is on the horizon, prepare your business for sale with an adviser before the buyer starts poking through the balance sheet.

Build a Clean Monthly Trend

A single tidy month does not prove anything. Buyers want to see a pattern. That means regular tracking of receivables, payables, stock, and cash long before the deal process starts.

Keep the monthly numbers consistent. Make sure debtor ageing is clear, stock counts are real, and short-term liabilities are properly recorded. If the trend is smooth and explainable, the peg is easier to defend.

A clean trend also helps you spot weak spots early. If receivables are drifting out, stock is building, or creditors are being stretched, you can fix the problem before it becomes a price chip.

Use Due Diligence to Spot Risks Early

Early due diligence is not just for buyers. Sellers who run their own review first can see the problems coming.

Look for aged debtors, slow-moving stock, unrecorded liabilities, tax arrears, and odd accruals. These are the bits buyers notice fast, and they rarely ignore them. A clean review gives you a better shot at holding your price.

It also makes negotiation calmer. A buyer who sees tidy working capital, clear support, and no hidden surprises is less likely to push hard on the final adjustment.

How Consult EFC can help

Working capital is not an accounting footnote. It can change the real exit price in both the term sheet and the SPA.

Clear definitions, a fair peg, and proper preparation protect value. Get those three things right, and the headline price is far more likely to stay close to the cash you actually keep.

If you want help getting your numbers in shape before a growth round or sale, Talk to an ICAEW-regulated Corporate Finance Adviser today.