" "
Healthcare Founder Toolkit
PHARMAPRO
The Working Capital Adjustment: Why the Sale Is Not Over When You Think It Is
Most healthcare founders assume the financial risk ends when the sale closes. The working capital adjustment means it does not. Here is a practical guide to understand what it is, how it works, and where founders leave money on the table.
Most founders assume the financial risk of selling their business ends on the day the deal closes. The purchase price is agreed. The documents are signed. The money arrives. Done.
That assumption is wrong.
One of the most common ways founders receive less than the agreed purchase price is through something called the Working Capital Adjustment — a mechanism built into almost every acquisition agreement that can shift real money between buyer and seller after the deal has closed.
This is not obscure fine print. It is a standard part of how acquisitions are structured. But it is also consistently one of the least understood aspects of a sale, and one of the areas where founders without prior experience leave the most money on the table.
That assumption is wrong.
One of the most common ways founders receive less than the agreed purchase price is through something called the Working Capital Adjustment — a mechanism built into almost every acquisition agreement that can shift real money between buyer and seller after the deal has closed.
This is not obscure fine print. It is a standard part of how acquisitions are structured. But it is also consistently one of the least understood aspects of a sale, and one of the areas where founders without prior experience leave the most money on the table.
1
What is Working Capital?
Term sheet language:
"The Purchase Price shall be subject to adjustment based on the difference between Closing Working Capital and the Target Working Capital (the Working Capital Peg), as calculated in accordance with the methodology set out in Schedule [X]."
"The Purchase Price shall be subject to adjustment based on the difference between Closing Working Capital and the Target Working Capital (the Working Capital Peg), as calculated in accordance with the methodology set out in Schedule [X]."
Working capital is the difference between a company’s current assets and its current liabilities.
Current assets are things the business owns or is owed that can be converted to cash within the next 12 months: cash in the bank, money owed by patients or insurers (receivables), pharmaceutical inventory, prepaid expenses.
Current liabilities are financial obligations due within the next 12 months: amounts owed to suppliers, outstanding staff salaries and benefits, advance payments received from patients or corporate clients, statutory dues
Current assets are things the business owns or is owed that can be converted to cash within the next 12 months: cash in the bank, money owed by patients or insurers (receivables), pharmaceutical inventory, prepaid expenses.
Current liabilities are financial obligations due within the next 12 months: amounts owed to suppliers, outstanding staff salaries and benefits, advance payments received from patients or corporate clients, statutory dues
Working Capital = Current Assets - Current Liabilities
A business with positive working capital has more short-term assets than short-term obligations. A business with negative working capital owes more in the short term than it currently holds.
In an acquisition, the buyer’s valuation of your business assumes a certain “normal” level of working capital — typically based on your historical averages. The working capital adjustment is the mechanism that ensures the business is actually delivered at that normal level.
2
Why The Working Capital Adjustment Exists
The adjustment protects both sides. Understanding which risk it is protecting against helps you negotiate it more effectively.
Protect The Buyer
To Protect The Buyer From The Seller From Stripping Cash Before Closing:
Without a working capital adjustment, a seller could take steps in the weeks before closing to extract extra cash from the business by: aggressively collecting patient payments early, delaying payments to suppliers, running down pharmaceutical or consumables inventory.
Each of these actions moves cash into the seller’s pocket before the deal closes — but leaves the buyer with a business that has less cash, owes more to suppliers, and has lesser inventory than the valuation assumed.
The working capital adjustment prevents this by requiring the business to be delivered at its normal operating level. If it arrives with less than the agreed working capital target, the seller pays the difference.
Protect The Seller
To Protect The Seller From Losing Money They Have Already Earned:
The adjustment works in the other direction too. Healthcare businesses often have receivables that take time to collect — payments from insurance companies, corporate health agreements, or government schemes that are legitimately owed but arrive weeks or months after the service was delivered.
Without a working capital adjustment, if a large receivable is collected one day after the deal closes, that cash belongs to the buyer — even though the service was delivered and the revenue was earned while the seller still owned the business.
The working capital adjustment ensures that receivables earned before closing are credited to the seller, regardless of exactly when they land in the bank.
3
How The Working Capital Peg Works In Practice
The working capital peg is the agreed “normal” level of working capital that the business should have at closing. It is set during negotiations, before the deal closes.
After closing — typically 30 to 90 days later — both sides calculate the actual working capital on the closing date and compare it to the peg.
After closing — typically 30 to 90 days later — both sides calculate the actual working capital on the closing date and compare it to the peg.
-
If actual working capital is higher than the peg, the seller receives the difference as an addition to the purchase price - If actual working capital is lower than the peg, the buyer receives the difference as a reduction to the purchase price — usually deducted from funds held in escrow
Here is a simple example:
- Agreed working capital peg: ₹5 crore
- Actual working capital on closing date: ₹4 crore
- Shortfall: ₹1 crore
- Result: ₹1 crore is deducted from the seller’s proceeds
A difference of ₹1 crore is not trivial. In a ₹50 crore transaction, it represents a 2% reduction in proceeds. In practice, working capital disputes can be significantly larger than this, particularly in healthcare businesses with high receivables or seasonal cash flow patterns.
4
Where Healthcare Founders Leave Money on the Table
The working capital adjustment sounds technical. The places where it goes wrong are mostly practical.
Accepting a buyer’s definition of working capital without scrutiny
Working capital is rarely as simple as current assets minus current liabilities. The definition of which items are included — and how each is valued — is heavily negotiated, and the buyer has an incentive to define it in a way that sets a high peg.
A higher peg increases the likelihood that actual working capital on closing day falls short of it, triggering a payment from seller to buyer. Common areas of negotiation include whether certain receivables are included or excluded, how inventory is valued, and whether specific accruals are treated as current liabilities.
A higher peg increases the likelihood that actual working capital on closing day falls short of it, triggering a payment from seller to buyer. Common areas of negotiation include whether certain receivables are included or excluded, how inventory is valued, and whether specific accruals are treated as current liabilities.
What To Watch:
Review the definition of working capital in the acquisition agreement line by line. Every inclusion and exclusion has a financial consequence. Do not accept the buyer’s first draft as standard.
Review the definition of working capital in the acquisition agreement line by line. Every inclusion and exclusion has a financial consequence. Do not accept the buyer’s first draft as standard.
Not Challenging How The Peg Is Calculated
The peg is typically set as an average of historical working capital over a defined period — the last 6 months, 12 months, or 24 months. Each choice produces a different number, and buyers will naturally argue for the period that results in the highest peg.
Healthcare businesses have seasonal working capital patterns. A hospital or diagnostics chain may naturally carry higher receivables in certain months due to seasonal demand or billing cycles. If the peg is calculated during a high-receivables period, the business may consistently fall short of it, triggering repeated adjustments in the buyer’s favour.
Healthcare businesses have seasonal working capital patterns. A hospital or diagnostics chain may naturally carry higher receivables in certain months due to seasonal demand or billing cycles. If the peg is calculated during a high-receivables period, the business may consistently fall short of it, triggering repeated adjustments in the buyer’s favour.
What To Watch:
Propose a peg based on a full 12-month average to smooth out seasonal variation. If the business has grown significantly, argue against using older periods where working capital was structurally lower.
Propose a peg based on a full 12-month average to smooth out seasonal variation. If the business has grown significantly, argue against using older periods where working capital was structurally lower.
Poor Financial Records Make The Adjustment Harder To Defend
Most early stage, privately owned, businesses do not maintain financial statements that are fully audited and prepared to the standard a buyer’s advisors will expect. This is not unusual or problematic in itself — but it does create challenges in the working capital calculation.
When financial records are not consistently maintained, it becomes harder to establish what “normal” working capital actually looks like. It also makes it harder to defend your position if the buyer disputes the closing calculation.
When financial records are not consistently maintained, it becomes harder to establish what “normal” working capital actually looks like. It also makes it harder to defend your position if the buyer disputes the closing calculation.
Common areas where healthcare businesses have gaps that affect the working capital adjustment include:
- Staff leave, bonuses, and incentive payments that have not been properly accrued month by month — meaning the balance sheet understates actual liabilities
- Advance payments received from corporate clients or insurance companies that have not been recognised as deferred revenue — these are liabilities until the service is delivered
- Old receivables that are unlikely to be collected but are still sitting on the balance sheet at face value — these overstate actual assets
- Prepaid expenses that have expired but are still recorded as assets
- Outstanding statutory dues — GST, PF, ESI, TDS — that have not been properly recorded as current liabilities
What To Watch:
Before entering a sale process, prepare a clean set of management accounts and ensure your working capital is presented accurately. A ₹1 crore discrepancy in receivables or accruals is a ₹1 crore adjustment to your proceeds.
Before entering a sale process, prepare a clean set of management accounts and ensure your working capital is presented accurately. A ₹1 crore discrepancy in receivables or accruals is a ₹1 crore adjustment to your proceeds.
Underestimating The Post-closing Negotiation
The working capital adjustment is calculated and negotiated 30 to 90 days after the deal closes. By that point, many founders have mentally moved on. The buyer’s advisors, by contrast, are working through the numbers carefully.
This timing creates an imbalance. Founders who are not actively engaged in the post-closing calculation, or who do not have advisors representing their interests during that period, often find themselves accepting adjustments they could have challenged.
It is also worth noting that buyers are aware of a practical constraint- In many healthcare acquisitions, they still need the founder’s cooperation during the transition. A buyer who pushes too aggressively on the working capital adjustment risks damaging a relationship they still depend on. This gives founders more negotiating room than they realise.
This timing creates an imbalance. Founders who are not actively engaged in the post-closing calculation, or who do not have advisors representing their interests during that period, often find themselves accepting adjustments they could have challenged.
It is also worth noting that buyers are aware of a practical constraint- In many healthcare acquisitions, they still need the founder’s cooperation during the transition. A buyer who pushes too aggressively on the working capital adjustment risks damaging a relationship they still depend on. This gives founders more negotiating room than they realise.
What To Watch:
Retain your financial advisor through the post-closing period, not just until the deal closes. The working capital calculation deserves the same attention as any other part of the transaction.
Retain your financial advisor through the post-closing period, not just until the deal closes. The working capital calculation deserves the same attention as any other part of the transaction.
4
How to Prepare Before You Go to Market
The single most effective thing a healthcare founder can do to protect themselves in a working capital adjustment is to get the numbers right before the sale process begins.
- Ensure receivables are accurately stated — old or doubtful amounts written down, not carried at face value
- Ensure all staff liabilities are properly accrued — outstanding leave, bonuses, and statutory contributions
- Clear old prepaid balances that are no longer active
- Ensure all outstanding statutory dues are correctly recorded
- Prepare a consistent set of monthly management accounts going back at least 12 months
- A clean balance sheet is not just good practice. It reduces the opportunity for a buyer to argue that working capital was overstated, and it gives you a stronger foundation from which to defend your position in the post-closing calculation.
The Sale Is Not Over When You Think It Is
- The working capital adjustment is not a technicality. In healthcare transactions, where receivables from insurers and government schemes can be significant and cash flow is often seasonal, the adjustment can represent a meaningful portion of your final proceeds.
Founders who understand how it works — and who prepare for it in advance — are in a much stronger position to protect what they have negotiated.
Those who leave it to their buyer’s advisors to calculate after closing, without advisors of their own reviewing the numbers, often find the final amount received is less than the purchase price they agreed.
“
The agreed purchase price is the starting point. The working capital adjustment determines where you end up.