So we're in the final stages of selling our landscaping business and the buyer's LOI has a working capital adjustment clause. I've never dealt with this before. Our accountant says it's standard but I'm worried they'll nickel and dime us on the closing statement. Any of you been through this? How do you make sure you don't get screwed after you've already handed over the keys?
Closing Mechanics
How to handle working capital adjustments as a condition of closing
The NWC adjustment is standard but the devil is in the definition. Make surre you and the buyer agree on exactly what counts as current assets and current liabilities BEFORE you sign anything. We got burned because the buyer excluded a bu nch of AR that was over 90 days old. Cost us about $80k at closing.
80k is a rounding error if you ask me. Just sell the thing and move on.
That's easy to say when it's not yofur 80k. The key is getting a peg. Your target should be based on a trailing 12-month average, not just the last month. If they insist on last month, you need to look at seasonality. Landscaping business has huge swings, so a December peg would screw you if closing is in June.
Oh great, another forum expert who read one article on investopedia.
Better than someone who contributes nothing. I've actually closed two businesses. The peg matters. Also watch out for the 'ordinary course' language in the purchase agreement. It's vague enough that the buyer can argue you didn't collect receivables fast enough or paid bills too quickly to juice the number.
We sold our irrigation company last year. The buyer tried to hit us with a $15k adjustment for 'unbilled work in progress.' My advice: get your books cleane up by a CPA who has done M&A deals, not just your regular tax guy. Ours missed a bunch of stuff and we had to scramble.
This. Get an M&A attorney and a transaction accountant. The fees sting but they'll catch the stuff you don't even know to look for. Also, insist on a post-closing true-up period. If they find an error, you get to fix it, not just eat it.
True-up periods just invite arguments. Set a hard peg and hold the line. If they won't agree, walk.
Yeah walk away from a landscaping business sale over a working capital clause. Brilliant.
Honestly the hardest part is the timing. The buyer wants to close fast, but you need time to prepare a proper closing statement. Push for at least 30 days to finalize the numbers after signing. And don't let Them hold back a big escrow for this. Keep it small.