Navigating Business Sales: The Crucial Role of Working Capital Adjustments

In the intricate process of selling and buying businesses, the finalisation of the sale price is a meticulous process that involves considerations beyond the surface-level cash exchange. Among the key factors in this complex financial transaction are working capital adjustments. In this blog, we will explore the nuances of working capital adjustments and their significance in the process of finalising the sale price.

How to Finalise the Price: Cash, Debt, and Working Capital

Finalising the sale price of a business goes beyond a straightforward cash transaction. It involves a careful balance between cash, debt, and the critical element of working capital. Working capital, the difference between a company's current assets and current liabilities, plays a pivotal role in the day-to-day operations of a business. In the context of a business sale, the agreed-upon price is often subject to adjustments based on the working capital at the time of closing.
Working capital adjustments aim to ensure that the buyer inherits a business with sufficient liquidity to operate effectively. If the working capital has increased or decreased between the signing and closing dates, the purchase price is adjusted accordingly, reflecting the financial health of the business at the point of transition.

Enterprise Value to Equity Bridge

Understanding the transition from enterprise value to equity value involves navigating the equity bridge—a financial mechanism that facilitates the adjustments needed to arrive at the final equity value. Enterprise value represents the overall value of the business, including debt and excluding cash. The equity bridge, however, adjusts this enterprise value to determine the ultimate equity value that the buyer will pay.


Working capital adjustments are a critical component of the equity bridge, addressing changes in short-term assets and liabilities. This ensures a fair distribution of value between the buyer and the seller, accounting for fluctuations in working capital and other relevant adjustments.

Effect of Due Diligence on Equity Bridge

Due diligence, the thorough investigation of a business's financials, operations, and legal standing, significantly influences the equity bridge. The equity bridge acts as a bridge between the initially agreed-upon enterprise value and the actual equity value, adjusting for any discrepancies revealed during due diligence.


For instance, if due diligence exposes inaccuracies in the reported working capital figures, the equity bridge allows for precise adjustments. It serves as a mechanism to maintain transparency and fairness in the transaction by ensuring that both parties are on the same page regarding the financial health and obligations of the business.

Example of Equity Bridge in a Balance Sheet

Let's consider a hypothetical scenario to illustrate the concept of an equity bridge. Imagine a business with an enterprise value of €15 million and an agreed-upon working capital of €2 million. Due diligence reveals that the actual working capital at closing is €1.5 million. The equity bridge would adjust the equity value as follows:
  • Initial Equity Value: €15 million (Enterprise Value) - €2 million (Agreed Working Capital) = €13 million
  • Adjusted Equity Value: €13 million (Initial Equity Value) - €0.5 million (Working Capital Adjustment) = €12.5 million
In this scenario, the buyer pays €12.5 million as the final equity value, reflecting the revised working capital figures uncovered during due diligence.  


In conclusion, working capital adjustments serve as a linchpin in the intricate process of finalising the sale price of a business. The equity bridge, influenced by factors such as due diligence findings, ensures that the agreed-upon enterprise value aligns with the actual equity value at the time of transition. As businesses change hands, understanding the dynamics of working capital adjustments is crucial for a smooth and equitable transaction.


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