The Working Capital Trap

Most founders have never heard of a working capital true-up. They will. Usually about 90 days after closing, when a check they thought was final gets adjusted downward by a number they didn't see coming.

Working capital is the cash the business needs to operate day-to-day. Receivables, inventory, prepaid expenses minus payables and accrued liabilities. Every operating business has a working capital balance. The buyer wants to make sure the business they just bought has enough cash in the tank to keep running.

Reasonable enough. Until you see how the measurement works.

The Gas Tank

Think of selling your car. The buyer says the tank has to be full at delivery. Fair. But the buyer gets to define what "full" means. They measure the tank 90 days after you hand over the keys. And if the gauge reads below their target — a target they set using their own methodology — the difference comes out of your sale price.

You'd call that rigged. In PE deals, it's called a working capital adjustment.

How the Trap Works

The Crossfield purchase agreement set a working capital target based on a trailing 12-month average. Ridgeline's accountants calculated the target. The founders' team reviewed it, negotiated minor adjustments, and agreed.

The problem wasn't the target. The problem was the measurement.

Working capital is measured at closing, but the true-up calculation typically happens 60–120 days later — using the buyer's accounting team and their interpretation of Generally Accepted Accounting Principles (GAAP). The buyer controls key judgments. Which receivables are "collectible." Which accruals are "valid." Which prepaid expenses "survived" closing. Which one-time items get normalized.

At Crossfield, the 90-day true-up produced a $1.8M adjustment against the founders. A receivable Ridgeline's team reclassified as doubtful — the customer paid in full 45 days later. An accrued liability for a vendor dispute booked at full claim value — it settled at 30 cents on the dollar. A prepaid insurance policy that Ridgeline canceled post-close and argued shouldn't count.

Each position was technically defensible. Each was aggressively interpreted. And the founders had 30 days to dispute — against the buyer's accountants, using the buyer's methodology, while James was now employed by the buyer.

The $1.8M came directly out of proceeds the founders thought were final. It wasn't a line item in the LOI. It wasn't a major negotiation point. It appeared three months after closing, presented as arithmetic. The purchase price the founders agreed to was no longer the purchase price they received.

Deal Spectrum: 7/10

The left column shows what a founder-favorable version of this term looks like. The right column shows what Crossfield signed.

The mental model is the Measurement Trap. The target isn't the risk. The measurement is. Whoever controls the methodology controls the outcome. In most PE deals, that's the buyer.

The Crossfield Moment

Ninety-three days after closing, James received a five-page working capital calculation from Ridgeline's accounting team. Attached was a wire instruction for $1.8M — payable from the founders' proceeds.

James called Dan. It was their first conversation in weeks. Dan's only question: "Can we fight it?"

James looked at his employment agreement. He looked at the 30-day dispute window. He looked at the fact that the arbiter was the buyer's accounting firm.

"Not without making my life here very difficult."

They paid the $1.8M.

Founder Protection Tips

Negotiate a locked-box mechanism whenever possible. This fixes the price at signing with no post-close working capital adjustment — the cleanest structure for sellers.

If a true-up is unavoidable, demand a mutually agreed target with clear definitions. An independent accountant — not the buyer's firm — should serve as final arbiter on disputes.

Include strict timelines and caps on adjustments. Sixty days maximum for the true-up calculation, with a defined ceiling on how much the price can move.

Push for normalized working capital that excludes one-time items and buyer post-close decisions. If the buyer cancels a policy or reclassifies an asset after closing, that's their call — not your deduction.

Read before you sign.