What Is a Working Capital Adjustment in Agency M&A?
A working capital adjustment is a post-closing mechanism that ensures the agency is delivered to the buyer with an adequate level of operating cash and current assets. It's one of the most negotiated — and least understood — terms in agency deals.
How It Works
Before closing, the buyer and seller agree on a "working capital peg" — the normal level of working capital the agency needs to operate (current assets minus current liabilities). At closing, if the actual working capital is above the peg, the buyer pays the seller the difference. If it's below, the purchase price is reduced.
Why This Matters for Agency Founders
Agencies often have significant accounts receivable (client invoices outstanding) and deferred revenue (retainers paid in advance). The working capital peg determines how much of that cash stays with the business vs. comes to you as the seller. A poorly negotiated peg can reduce your effective sale price by 5–15%.
Common Pitfalls
- Seasonal fluctuations: If your agency has seasonal revenue patterns, insist on using a 12-month average, not a single month snapshot
- AR quality: Aged receivables (90+ days) are often excluded or discounted
- Deferred revenue: Prepaid retainers may be treated as a liability, reducing working capital
Related terms: Earn-Out, Adjusted EBITDA, Quality of Earnings
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