What Is a Working Capital Adjustment, and How Does It Work?

By: Wes Forgione · Forgione Deal and Corporate Counsel

Current to July 27, 2026

Why the Headline Price Often Changes

A purchase price usually assumes the buyer is getting a working business, not an empty shell. That means enough money tied up in unpaid customer invoices, inventory, and short-term bills to keep the business running day to day. A working capital adjustment tests that assumption. If the business is handed over short of that cushion, the price usually drops to match, dollar for dollar. If it's handed over with more than expected, the price usually goes up the same way. Done properly, the adjustment doesn't reopen the deal. It just makes sure both sides get the number they actually agreed to.

How the clause is written matters more than most people expect. The Supreme Court of Canada has said that courts interpret a contract by reading its actual words in light of the surrounding circumstances (Sattva Capital Corp. v. Creston Moly Corp., 2014). In a working capital clause, that means the definition, the sample calculation, and the dispute process carry real weight. They should be written in clear, specific language, because that language is exactly what a court or an accountant will rely on if the two sides ever disagree.

What Counts as Working Capital

Working capital usually means the accounts tied to daily operations. On the asset side, that's unpaid customer invoices, inventory, and some prepaid expenses. On the liability side, it's unpaid supplier bills, accrued costs, and deposits already collected from customers. Most working capital adjustments exclude cash, indebtedness, income-tax balances, and one-time transaction expenses, because those items are usually handled separately, through a cash-free, debt-free purchase-price structure or through separate debt, cash, and transaction-expense adjustments. The working capital adjustment is meant to measure the ordinary operating cushion delivered with the business, not to re-price every balance-sheet item.

This is where a lot of disputes start. If the agreement doesn't say clearly whether something counts as working capital, debt, or cash, it can end up counted twice, or missed completely. A careful definition stops a buyer from cutting the price once through debt and again through working capital. It also stops a seller from arguing that an obvious day-to-day cost somehow sits outside the calculation.

Setting the Target

The target is the number the actual closing figure gets measured against. Many deals base it on a 12-month average, since that usually reflects the business's normal needs better than a single date on the calendar.

But averages can mislead. A seasonal business, a fast-growing business, or one that recently changed how it collects payments or manages inventory may not be captured fairly by a simple average. Buyers usually want a target that reflects what the business needs on day one after closing. Sellers usually want a target that reflects how the business has always operated, not a model built after the deal was already signed. This is a real negotiation, and all related working capital clauses in the agreement should be drafted carefully with accountant involvement and assent.

How the Accounting Rules Are Chosen

Many working capital disputes are framed as accounting issues, but the starting point is always the contract. The purchase agreement should say which rules control the calculation, and in what order. A clear hierarchy avoids the argument later over whether the parties meant "GAAP," the seller's historical practices, or the specific deal rules they negotiated.

A common hierarchy is:

1. the specific definitions and exclusions in the purchase agreement;
2. the sample working capital calculation attached as a schedule;
3. the seller's historical accounting practices, applied consistently; and
4. the applicable accounting standard, such as ASPE, IFRS, or GAAP, only to the extent not already addressed.

That order matters because general accounting standards were not written for any specific deal. They may allow more than one treatment, and they may not reflect how the parties priced the business. In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, the Supreme Court confirmed that contractual interpretation begins with the language the parties used. In a working capital clause, the negotiated wording should be paramount before any general accounting rules are applied.

The Two-Step Payment Process

Most deals use two statements. Before closing, someone, often the seller, prepares an estimate. That estimate sets the amount paid on closing day. After closing, once the books are settled and the buyer has full access to the records, a final statement gets prepared. The seller then reviews it and can raise objections. Whatever gap remains between the estimate and the final number gets paid as a true-up.

This only works smoothly if the agreement controls the process. It should say when the final statement is due. It should say how long the other side has to object, what an objection has to include, and which records the reviewing side can see.

When the Two Sides Disagree

If an objection can't be resolved, many purchase agreements send the disputed working capital items to an independent accountant. The agreement should say exactly what the accountant is being asked to decide. That could be the disputed accounting items only, the final working capital number, or broader questions about how the agreement should be interpreted.

That distinction matters. An independent accountant may be acting as an expert, not an arbitrator, and the two roles work differently. In Sport Maska Inc. v. Zittrer, [1988] 1 S.C.R. 564, the Supreme Court of Canada confirmed that an expert determination is different from an arbitration, and that the difference depends on the role the contract actually gives the decision-maker. In practice, this means the purchase agreement should spell out the accountant's mandate, process, and limits. It shouldn't rely on the label "independent accountant" to answer that question on its own.

Ontario courts will generally hold parties to the dispute process they chose. In 2832402 Ontario Inc. v. 2853463 Ontario Inc., 2022 ONSC 2694, the court dealt with a post-closing purchase-price adjustment under an SPA that sent unresolved disputes to an "Independent Accountant." Applying Sport Maska, the court held that the clause functioned as an arbitration agreement, even though it did not use the word "arbitration," and stayed the court application so the agreed process could proceed. The lesson is practical: if the agreement sends adjustment disputes to a specified private decision-maker, the parties should expect the court to enforce that process according to its wording.

Because of this, the clause should say who appoints the accountant if the parties can't agree, what materials each side may submit, whether new calculations can be introduced partway through, who pays the accountant's fees, and whether undisputed amounts must be paid while the dispute is still pending.

A target that's too generous to one side rarely looks like a mistake when it's signed. It looks like a clause nobody read closely enough before the ink dried.

What Each Side Worries About

Buyers worry about receiving a business with its cushion quietly stripped out. That can mean unpaid invoices that will likely never get collected, inventory that's outdated or slow to sell, unrecorded bills, or a seller who moved money around right before closing. Buyers also need real access to the seller's records after closing, or the review process becomes a guessing game.

Sellers worry about the opposite: a buyer using the post-closing review to renegotiate the deal after already taking control. That can look like new accounting rules, overly cautious reserves, or a final statement that arrives late on purpose. A tightly written hierarchy, firm deadlines, and a fair dispute process protect against both risks. Sellers should also build a mock closing statement before signing, not after a dispute starts.

Asset Sales and Share Sales Work Differently

Working capital adjustments show up in both share sales and asset sales, but the starting point is different. In a share sale, the buyer takes over the whole company, so the calculation usually starts from the company's own balance sheet. In an asset sale, the buyer is only picking up specific assets and specific liabilities. That means the agreement has to say exactly which unpaid invoices and which bills are actually changing hands. Because of that extra work, working capital adjustments are less common in asset sales than in share sales, and some asset deals skip them in favour of a simpler, fixed inventory or receivables count instead. The mechanism still works in an asset deal when it's used. It just can't borrow the balance sheet logic of a share sale without adjustment.

Where Disputes Actually Happen

The same handful of issues come up again and again. Should old, unpaid invoices count at full value? Is the inventory really saleable? Were payroll and vendor bills fully recorded? Were deposits and prepaid revenue measured the same way as before? And did any item get counted twice, once as debt and once as working capital?

Five Common Mistakes

• “Setting a target from the wrong months and letting the whole deal drift off course.”
• “Leaving cash, debt, and working capital loosely defined, so the same item gets counted twice.”
• “Naming a general accounting standard instead of a clear order of priority.”
• “Letting the post-closing true-up quietly become a second negotiation over price.”
• “Signing the agreement without testing it against a mock closing statement first.”

Ontario FAQs

Related Articles

Primary Authorities Cited

• Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633 — how courts interpret a commercial contract's actual wording in light of the surrounding circumstances.
• Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2016 SCC 37, [2016] 2 S.C.R. 23 — contract interpretation starts with the words the parties actually chose.
• Sport Maska Inc. v. Zittrer, [1988] 1 S.C.R. 564 — an expert determination is different from an arbitration, depending on the role the contract gives the decision-maker.
• 2832402 Ontario Inc. v. 2853463 Ontario Inc., 2022 ONSC 2694 — an "independent accountant" clause functioned as an arbitration agreement, even without the word "arbitration," and the court stayed the proceeding.

This article gives general information about Ontario and Canadian law, current to July 27, 2026. It is not legal, accounting, tax, or investment advice, and it doesn't replace advice about your specific situation. Reading it doesn't create a lawyer-client relationship. Laws and practices change. Get advice from a qualified Ontario lawyer and your accountant before agreeing to a working capital target or signing a purchase agreement.

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