Quantifying Off Balance Sheet Cap Table Dilution in Acquisition Indemnity Holdbacks
Off balance sheet indemnity holdbacks dilute equity holders when post closing liability claims trigger unmodeled share issuances outside primary cap tables.
working capital true up
Meaning
A post-closing financial adjustment aligns the estimated working capital delivered at transaction close with the actual balance determined weeks later. In corporate acquisitions, a working capital true up ensures that the final purchase price is adjusted to reflect the exact assets and liabilities transferred to the buyer. This adjustment takes place ninety days after the transaction closes.
It ceases to apply once the final audit is signed.
Adjusting Process
The buyer’s accountants prepare a balance sheet of the business as of the closing date. This document is compared to the estimated balance sheet delivered by the sellers before the close. If the actual working capital is lower than the estimate, the purchase price is reduced.
In cases where it is higher, the buyer pays the difference to the sellers.
Account Difference
These adjustments often cause disputes if the parties used different accounting methods to calculate the numbers. The purchase agreement must define the accounting policies to be used, such as following past practices or standard principles. Disagreements are referred to an independent accounting firm for a final decision.
This process prevents long court battles over balance sheet details.
Cash Transfer
The final resolution of the true up involves a cash transfer from the escrow account or directly from the buyer. This payment settles the transaction’s working capital account. It concludes the financial adjustments between the buyer and the sellers.