When you’re buying or selling a business, one of the most overlooked — yet most contentious — elements of the deal is the working capital adjustment.

If you’ve ever watched a deal get stuck in the late stages, there’s a good chance it was due to disagreements over working capital. That’s because the standard accounting definition doesn’t always fit what’s needed in a real-world business transition.

At Zatara Transaction Advisors, we use a pragmatic and deal-tested approach to calculate working capital — based on the Monty Walker method.

Let’s break down how it works and why it matters.

Why Traditional Accounting Definitions Fall Short

Your accountant might define working capital as:

Current Assets – Current Liabilities

Technically, that’s correct. But when it comes to mergers and acquisitions (M&A), that definition can miss the mark. Not all “current” accounts are relevant to day-to-day operations — and not all liabilities should be factored into the final number either.

What We Exclude (and Why)

We don’t include everything in our calculation. That’s intentional.

Here’s what we exclude from the working capital formula:

• Cash and Cash Equivalents
  These are usually left with the seller or addressed separately in the purchase agreement.
• Short-Term Investments & Loans
  These aren’t needed to operate the business and distort operational liquidity.
• Owner & Employee Receivables
  These are personal or exceptional transactions, not tied to operations.
• Excess Inventory
  Inventory that was purchased as an investment or in excess of normal operating requirements doesn’t count.

By removing these, we get a more accurate picture of what’s really needed to keep the business running post-close.

What We Include

On the flip side, here’s what goes into our working capital calculations:

• Accounts Receivable
• Inventory (including raw materials, WIP, finished goods)
• Prepaid Expenses (rent, deposits, etc.)
• Costs in Excess of Billings

These are the assets that fuel operations — the lifeblood of the company day-to-day.

Liability Adjustments

Many liabilities are simply not operational in nature, so we exclude them:

• Accrued interest
• Overdrafts
• Dividends payable
• Tax payables
• Unearned revenue (if held in cash and not yet earned)

What do we include?

• Accounts Payable
• Accrued Expenses
• Unearned Revenue held in Receivables
• Deployed Customer Deposits
• Billings in Excess of Costs

These better reflect the real, near-term cash demands of the business.

Why Buyers and Sellers See It Differently

This part is key: sellers want to minimize the amount of working capital left in the business. Buyers want the opposite — as much as possible.

So, the seller’s accountant will strip everything they can. The buyer’s accountant will try to throw everything in. Without a shared framework like the Monty Walker method, it turns into a tug-of-war that delays deals and frustrates everyone.

What Happens When You Don’t Agree?

If there’s no agreement on how working capital is defined in the LOI or APA, this becomes a battleground.

That’s why we advise our clients to define the working capital mechanism clearly up front — ideally with a sample calculation.

One common source of friction is excess inventory. It might technically qualify under accounting rules, but it’s not needed to run the business. We usually recommend excluding it unless both parties agree otherwise.

Avoiding the Fight

The easiest way to avoid disputes? Set a working capital target during negotiations, and have both parties sign off on what’s included and excluded.

If both sides agree on that number — and how it was reached — there’s nothing left to argue about.

Final Thoughts

Working capital doesn’t have to be a black box or a deal killer. But it does have to be calculated in a way that reflects operational reality — not just what the accounting textbook says.

By using a clear method like the Monty Walker framework and agreeing on inclusions/exclusions upfront, you can protect yourself from surprises and avoid unnecessary deal friction.

Need Help Navigating a Deal?

If you’re looking at buying or selling a business and want help managing the numbers — especially the working capital adjustment — we’ve got your back.

Reach out to us and let’s make sure your deal doesn’t get stuck over details like these.