Closing a business sale does not always settle the purchase price. Weeks later, the buyer’s closing statement may show less working capital than expected, and the seller may disagree with the accounting behind that result. A working capital adjustment dispute can affect escrow funds, payment obligations, and the parties’ relationship. For California businesses and individual buyers or sellers, the starting point is the purchase agreement. This article explains what to review, how to preserve objections, and when an accounting disagreement becomes a legal dispute.
Why the purchase price changes after closing
Many acquisition agreements set an initial purchase price using estimated closing figures. After closing, the buyer prepares a statement using more complete information. The agreement then adjusts the price by comparing closing working capital with an agreed target, sometimes called a “peg.”
Working capital often means specified current assets minus specified current liabilities. But the contract’s definition controls. Cash, debt, taxes, transaction expenses, and related-party balances may be excluded or addressed elsewhere in the price formula.
For example, suppose the target is $500,000 and the agreement calls for a dollar-for-dollar adjustment. If final closing working capital is $450,000, the price generally decreases by $50,000 under that formula. If the seller already received a payment based on a different estimate, the final amount owed must account for that earlier adjustment.
The arithmetic may be simple. The disagreement usually concerns which numbers belong in the calculation and which accounting rules apply. Careful mergers and acquisitions counsel can help evaluate those questions against the actual deal documents.
What drives a working capital adjustment dispute?
Buyers and sellers often disagree because the agreement refers to several accounting standards without clearly stating which takes priority. It might require generally accepted accounting principles, consistency with historical practices, and compliance with a sample calculation. Those directions do not always produce the same result.
Common disputed items include:
- Accounts receivable: Whether unpaid invoices need larger reserves, and whether later collections support their closing-date value.
- Inventory: Whether obsolete or slow-moving stock should be written down.
- Accrued liabilities: Whether unpaid bonuses, vendor invoices, or other expenses existed at closing.
- Deferred revenue: Whether customer prepayments belong in working capital and how they should be valued.
- Cutoff dates: Whether a transaction belongs before or after the closing measurement time.
- Duplicate deductions: Whether an amount has already reduced the price as debt or a transaction expense.
Later information can sometimes help establish a condition that existed at closing. That is different from charging the seller for a new condition created after closing. The agreement’s measurement rules and the supporting records matter.
Read the agreement before challenging the numbers
California contract interpretation starts with the parties’ mutual intention at the time of contracting, under California Civil Code section 1636. Section 1641 also calls for reading the contract as a whole so that its provisions work together. A disputed accounting term should therefore be evaluated alongside the definitions, schedules, adjustment procedure, and dispute-resolution clause.
Review these provisions together:
- The calculation rules: Identify exclusions, accounting priorities, sample schedules, and any limits on changing historical methods.
- The preparation deadline: Determine when the closing statement must be delivered and what the agreement says about delay.
- The objection procedure: Check the response deadline, required detail, delivery method, and designated recipients.
- Information rights: Confirm what access the seller receives to records, workpapers, personnel, and accountants.
- The payment mechanism: Review escrow instructions, setoff rights, payment timing, and interest provisions.
Do not assume that an informal email preserves an objection. Some agreements make unchallenged items final or require a notice stating each disputed amount and the basis for disagreement. Whether a missed step bars a challenge depends on the contract and applicable law, but it can create a substantial obstacle.
Build a documented objection, not just a competing total
A useful objection connects each challenged entry to a contractual rule and supporting evidence. Preserve the closing statement, historical financial statements, trial balances, invoices, inventory records, and relevant communications. Keep track of missing records and requests for access.
Prepare a schedule showing the buyer’s amount, the proposed correction, the difference, and the reason. Distinguish undisputed items from unresolved ones. This helps focus negotiations and may be necessary if the agreement limits the neutral accountant to specifically identified disputes.
Have an accountant assess the calculation and an attorney assess the agreement’s requirements. Their roles overlap, but they are not interchangeable. An accountant can evaluate a reserve methodology; counsel can assess whether the agreement permits that methodology. Avoid assuming that communications with an accountant are privileged merely because a dispute is underway.
Decide which dispute process applies
Many purchase agreements send unresolved accounting items to an independent accountant. Others require arbitration or litigation, or divide different issues between separate processes. The accountant’s authority may be narrow: resolving listed calculations rather than interpreting every contractual obligation.
A claim involving inaccurate representations, concealed liabilities, or failure to provide records may follow a different procedure from the working capital adjustment itself. Review indemnification provisions, claim deadlines, liability limits, and any restrictions on overlapping recovery.
California Code of Civil Procedure section 337(a) generally provides a four-year limitations period for actions on written contracts, subject to statutory exceptions. Claims governed by California Commercial Code section 2725, including certain contracts for the sale of goods, follow that section’s separate accrual and limitation rules. Section 2725 generally provides a four-year period but permits the original agreement to shorten it to not less than one year. The applicable deadline depends on the claim and contract language; contractual objection periods and forum-specific rules may require earlier action. Before withholding payment, drawing on escrow, or starting proceedings, assess the required forum and available contractual remedies.
Talk to a California business attorney
Itkin Law offers a free consultation for businesses and individuals evaluating a post-closing purchase price dispute, including objection deadlines and contractual resolution procedures. Schedule a free consultation or call (424) 603-8888.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. The law changes, and this article reflects the law as of its publication date. Every situation is different — contact us to discuss how the law applies to your exact circumstances. See our full disclaimer.
