Working Capital Pegs & Completion Accounts: Why the Final Price Isn't the Headline

Two founders shake hands on the same headline enterprise value and tell their families it is done. Sixty days after one of them closes, an email lands from the buyer’s accountants with a completion-accounts statement attached — and the figure reaching his account is several hundred thousand dirhams short of what he thought he had agreed. He had not been cheated. He had simply never been told that the price he signed was not the price he would receive, and that the gap is set by a mechanism most sellers never meet until it is used against them.

That mechanism is the working-capital adjustment, settled through either a locked-box or completion accounts. The broader deal-structure picture covers it in a few paragraphs, alongside earnouts and escrow; this is the deep-dive on the one part founders are least equipped to argue, because by the time it bites the heads of terms are signed and the leverage has shifted across the table.

The Bridge Nobody Draws For You

Almost every offer is quoted as an enterprise value — the worth of the operating business. But you do not own an enterprise value; you own shares, and what reaches your account is equity value: enterprise value, minus net debt, adjusted for working capital. That is where the headline leaks. Subtract net debt — borrowings, overdrafts, shareholder loans and anything debt-like, against surplus cash — then apply the working-capital adjustment for any gap against the agreed normal level. What remains is the cheque to shareholders, before fees, escrow and tax.

If you have never seen that bridge built for your own company, the valuation calculator constructs it. Run it before any buyer conversation, because every buyer will run it on you, and run the working-capital line their way.

The Working-Capital Peg, and How It Moves the Price

Here is the idea every founder meets the hard way. A buyer is not purchasing an empty shell; they are purchasing a business that can keep trading from the morning after completion — paying suppliers, funding stock — without injecting cash on day one. So the agreement fixes a peg: the normal level of net working capital (broadly, debtors plus inventory, less creditors) the business should carry. The price then adjusts against it — leave less than the peg and it falls by the shortfall the buyer must top up; leave more and it rises.

The point most founders miss is that the peg is negotiated, not calculated. There is no single correct figure in the accounts, because most businesses do not sit at a steady working-capital level. They breathe with the contract cycle, with a large receivable landing or a supplier payment going out: a Gulf construction-services firm carries heavy retentions and long debtor days; a distributor swings with shipment timing. The peg is meant to capture the average through that cycle, and the buyer has every incentive to anchor it high, because a peg set even modestly above your true normal is a built-in deduction the moment you complete.

So the working-capital schedule deserves the attention you gave the headline:

• Agree the definition, line by line — which accounts count as working capital, which are carved into net debt — rather than leaving it to the completion accountants later.
• Set the peg off a defensible average, ideally a twelve-month trailing one, far harder to skew than a convenient recent month.
• Watch the completion date. Closing when working capital naturally sits high — just before a big customer pays, or after you have built stock — hands the buyer an artificial shortfall.
• Settle it at the LOI, while competing buyers exist and your leverage peaks, not vaguely up front to be weaponised after.

The Debt-Like Items Buyers Argue Off the Price

If the peg is one lever, the net-debt line is the other, and where buyers are most creative. Your balance sheet calls a few things “debt”; a buyer’s diligence team will argue a much longer list is debt-like — a future cash outflow they are inheriting, and therefore a deduction from the equity price. Each comes straight off your cheque:

• Deferred revenue. Money customers have paid for goods or services you have not yet delivered. The cash is in the bank, but the obligation to perform transfers to the buyer — a liability they have effectively funded.
• Overdue payables. Suppliers stretched well beyond terms are, in effect, financing you have been quietly using; a buyer normalises them to standard terms and treats the stretch as debt.
• Accrued but unpaid bonuses and leave — earned before completion but paid after, a pre-closing cost the buyer settles and nets off.
• Unfunded end-of-service gratuity. In the UAE this is the big one, and the one founders most often miss. Accrued gratuity is a genuine statutory obligation to your staff that the buyer inherits, and the unfunded portion is routinely treated as debt-like even though no lender is owed a dirham. If your books under-provide for it — and many SME books do — diligence will true it up to the full liability and deduct the gap.

Buyers are not inventing these out of malice; each is real cash they must find. But the boundary between “working capital” and “debt-like” is genuinely contestable, and the side that defines it first usually wins — deferred revenue, in particular, costs you nothing inside the peg but is a straight hit as a separate deduction on top. Pin the definitions down before diligence, because once the buyer’s accountants are writing the completion statement, they argue from inside your numbers.

The Timing Choice: Locked-Box vs Completion Accounts

The price moves with working capital and net debt; the final decision is when that maths is fixed. Two routes, with very different consequences.

The locked-box fixes the price at signing. You and the buyer agree the equity value off a recent, audited balance sheet — the “box” — and lock it. From that date the business runs for the buyer’s economic benefit, and the only adjustment is for leakage: value escaping the box to the seller’s side afterward, such as dividends or owner bonuses. You know your number the day you sign.

Completion accounts leave the price provisional. You complete on an estimate, then — typically sixty to ninety days after closing — a fresh set of accounts is drawn up as at completion, working capital and net debt are measured, and the price is trued up against the peg, months after you have handed over the business.

The difference that decides it is dispute risk. Locked-box disputes are narrow, limited to leakage. Completion-accounts disputes are wide open — working-capital calculations, borderline items, accounting policies — and argued at the worst moment, when your leverage is gone and the buyer holds the business.

Why Clean Books Earn You the Locked-Box

The completion-accounts true-up is the rare negotiation a seller enters with less leverage than at the start, because the buyer now controls the business and the very books from which the adjustment is calculated. That is why, if your accounts are clean, recent and trusted, the locked-box is almost always the better mechanism: a fixed price, a faster close, no second negotiation after the keys have changed hands. But it is a privilege you earn. A buyer will only fix a price on your historic balance sheet if they believe it, and stale numbers or a diligence process that keeps surfacing surprises push them straight to completion accounts. So the ability to offer a credible locked-box is itself a dividend of preparation: the work in preparing your business for sale buys better structure on the way out, and the exit readiness scorecard flags the accounting gaps that send a buyer toward completion accounts.

The Mechanism That Decides the Cheque

None of this is glamorous, which is exactly why it is dangerous: founders brace for the price negotiation and the earnout, then lose six figures to a working-capital schedule they never thought to fight over. The headline is negotiated from strength, with buyers competing; the adjustment is settled from weakness, after the field has narrowed to one. So get the peg defined, the debt-like items bounded and the timing choice made before you sign the LOI, while the tension that won you the headline is still in the room.

If a sale is on your horizon, ground your number with the valuation calculator so you understand the enterprise-value-to-equity bridge before a buyer walks you down it, then pressure-test your books with the exit readiness scorecard to see whether they earn you a locked-box. Our M&A strategy and execution advisory runs this work end to end — valuation, structure, the working-capital negotiation, the completion mechanics — so the price you shake hands on is the price that reaches your account. For a direct read on your own deal, book a strategy session and we will walk the bridge against your actual numbers.