Why the amount an owner receives can differ from the headline valuation, and how to prepare for the discussion about normal operating funding.
In this perspective
Follow the bridge from value to proceeds.
A headline enterprise value commonly describes the value of operating activities on an agreed basis. The amount payable for the shares depends on the transaction terms, including how cash, debt and other adjustments are treated. In a completion accounts structure, working capital can form another part of that bridge.
The commercial question is straightforward: what level of operating funding should the buyer receive with the business at the agreed price? If the business needs inventory and customer credit to operate, removing that funding before completion would leave the buyer with an additional cash requirement. The agreement translates this question into definitions and a calculation.
Define the components before debating the number.
Transaction working capital is a negotiated measure. It may include trade receivables and inventory, less trade payables and other agreed operating liabilities. Its scope does not necessarily match a caption in the statutory accounts. Cash, borrowings, taxes, customer advances and other balances require explicit classification under the particular agreement.
Prepare a schedule showing every included account, its accounting treatment and the reason for its classification. Pay attention to provisions for doubtful debts, slow-moving stock, rebates and accrued expenses. Consistent definitions prevent an item from being counted twice or disappearing between the working-capital and debt adjustments.
Establish what normal means for this business.
A working-capital target, sometimes called a peg, should be assessed against the operating pattern. Monthly history can reveal seasonality, growth, changes in payment terms and exceptional balances that a single year-end figure conceals. An average is a starting point for analysis rather than an automatic answer.
For a manufacturer building inventory before a seasonal peak, the expected completion month matters. For a growing services business, receivables may have increased with activity. Explain the drivers and distinguish sustainable operating requirements from overdue collections, unusual purchases or deliberate changes in payment timing.
Understand the chosen price mechanism.
With completion accounts, the agreement can compare working capital at completion with the agreed target. Under a typical formulation, an excess increases the equity price and a shortfall reduces it, subject to the contractual definitions and any agreed limitations. The accounting policies and process for resolving disagreements are therefore part of the economics.
A locked-box structure generally fixes the equity price by reference to an earlier balance sheet and agreed terms governing value leaving the business. It does not make working capital irrelevant: the buyer still assesses the reference accounts and the funding needs of the business. The appropriate treatment depends on the chosen structure and negotiated protections.
Prepare a calculation both sides can inspect.
Build a monthly schedule that reconciles to the accounts, document proposed exclusions and show the effect of plausible completion dates. Use the same definitions in the valuation discussion, offer terms and definitive agreement. Ask accounting and legal advisers to review how the commercial intention translates into the calculation and contract.
Before agreeing a target, an owner should be able to explain what is included, why the amount is representative and how operating decisions before completion will affect proceeds. A clear working-capital analysis brings the discussion closer to the cash economics of the transaction.
