Working Capital Pegs and Completion Accounts: The Adjustment That Changes Your Net Cheque

The clause that costs vendors the most after settlement

The headline price is what gets celebrated. The working capital adjustment is what quietly determines whether the cheque that arrives a month after settlement matches the one you mentally banked. For New Zealand SMEs this is the single most common cause of post-settlement disputes — and most of them are avoidable.

What working capital is, in plain English

Working capital is the money tied up in the day-to-day operations of the business: the stock you hold, the debtors who owe you, the creditors you owe, the prepayments and accruals that haven't yet hit cash. It is not the same as the cash in the bank, which is normally excluded from the sale.

In a share sale, the buyer is buying the whole company including its working capital position at settlement. In an asset sale, the buyer is usually buying a defined set of working capital items at the agreed value.

Either way, the buyer wants the business to arrive on day one with enough working capital to keep operating without injecting new funds. The vendor wants to extract every dollar of value they have created. The "peg" is the negotiated middle ground.

The peg — and why it matters

A working capital "peg" or "target" is a number — agreed in the Sale and Purchase Agreement (SPA) — that represents a normal, sustainable level of working capital for the business. At settlement, the actual working capital is measured. If it is above the peg, the vendor is paid the surplus. If it is below, the vendor refunds the shortfall.

It looks simple. It is not. The arguments live in three places:

1. What number to set the peg at.
2. What goes into the calculation of actual working capital at settlement.
3. How items are valued, especially stock and aged debtors.

How to set the peg fairly

The standard market practice in NZ is to use an average of the most recent 12 months of month-end working capital balances, normalised for any obvious distortions:

• Seasonality (a Christmas retailer's stock peak is not "normal").
• One-off events (a large project debtor that won't recur).
• Recent capital injections or extractions by the owner.

Both sides should see and agree the 12-month working sheet before signing the SPA. A peg agreed in principle and calculated later almost always leads to a dispute.

Completion accounts: the post-settlement reckoning

The SPA will typically require the buyer to prepare "completion accounts" within 30 to 60 days of settlement, showing the actual working capital as at the settlement date. These accounts are then compared to the peg, and the difference is settled in cash.

The risks for the vendor:

• The buyer's accountant has every incentive to value stock conservatively, write off aged debtors, and recognise accruals aggressively — all of which reduce the actual working capital and increase the vendor's refund.
• Stock counts conducted by the buyer's team without the vendor present can produce surprises.
• Disputed items can sit unresolved for months.

How to protect yourself:

• Specify the accounting policies in a schedule to the SPA — not "GAAP" in general, but the specific policies you have been using.
• Insist on a joint stocktake at settlement, with both parties' accountants present and a signed stock list at agreed values.
• Cap or floor the adjustment if the business has lumpy working capital — a "collar" of plus/minus 5% can prevent small movements from triggering large arguments.
• Set a tight timetable for completion accounts and a clear dispute resolution mechanism (often an independent accountant nominated by the relevant institute).

Stock: the biggest single battleground

In stocked businesses — retail, wholesale, trades — the value placed on stock at settlement often moves the cheque by more than any other line. Common arguments:

• Aged or slow-moving stock: is it worth full cost, or written down?
• Obsolete stock: any value at all?
• Stock in transit: included or excluded?
• Consignment stock: whose is it?

Address all of this in the SPA. A simple rule like "stock more than 12 months old is valued at 50%, stock more than 24 months old is excluded" prevents a fight.

Debtors: who chases them, who owns them

In a share sale, the buyer inherits all debtors and chases them. In an asset sale, the SPA must specify whether debtors transfer or stay with the vendor.

Where they transfer, the vendor usually warrants that debtors will be collectible within a set period (say 90 days), and that uncollected debtors revert to the vendor at the end of that period. This is fair to both sides but only works if it is in the agreement.

Creditors and accruals: the easy thing to forget

Creditors reduce working capital. So do accrued expenses — wages owed, holiday pay liabilities, unpaid GST and PAYE, customer deposits held. If the buyer assumes these liabilities, they reduce the working capital that the vendor is delivering. Holiday pay in particular is often understated in New Zealand SMEs and can come up as a six-figure surprise.

What this means for you

Three steps that prevent most working capital disputes:

1. Run the 12-month working capital sheet yourself before you sign anything, with your accountant.
2. Negotiate the peg and the policies in the SPA, not at settlement.
3. Plan a joint stocktake and a clear completion-accounts timetable.

A few hours of work in advance is worth tens of thousands of dollars at the end.

General information only — every SPA is different; have your accountant and lawyer review the working capital clauses specifically before you sign.