When you're selling your business, there are lots of negotiations.

The headline figure normally gets set at the letter of intent (LOI) and most people are happy.

But then, assuming due diligence checks out and you approach settlement, the working capital numbers start becoming more real.

This is often the second price negotiation. Back and forth, line by line, on every adjustment.

And you don't really know what it's like until you go through it.

Why It's Harder Than the First One

You'd think the headline price would be the toughest part of a deal.

But the squishy stuff is actually easier to negotiate. How long you stay on after the sale, or how long the non-compete runs. Those things can be talked through, traded off or parked for later.

Settlement adjustments are different. They're real dollars and cents, and everyone can see them. So they get negotiated just as hard as the price.

Why Working Capital Adjustments Exist

Most deals are done on a cash-and-debt-free basis.

That means the seller keeps the cash in the bank and pays off any debt, and the buyer takes over the business without either.

Agencies don't carry much else on the balance sheet. No real estate, no fleet of cars, not a lot of equipment. So the area that gets the most attention is subscription revenue.

This is what can surprise people. Some of the cash in your bank is money customers paid you upfront for work you haven't done yet.

Once you sell, the responsibility to deliver that work (and get paid for it) belongs to the buyer.

The Two Big Buckets

A working capital adjustment usually comes down to two numbers.

Prepaid revenue. Customers who've paid upfront for services you still need to deliver, whether that's next month, next quarter or next year. You keep the cash, but the buyer has to do the work. So they'll ask for that money at settlement.

Prepaid expenses. Things you've already paid for that the buyer gets to use. Your annual HubSpot licence that's only two months in, or your office lease. You're handing over that value, so you get credit for it.

When you net off those two numbers, you've got your working capital adjustment.

I wrote about why prepaid revenue can be a liability in Why Recurring Revenue Changes Your Valuation. This is the moment that liability gets paid.

What It Looks Like in Practice

Say you agree on a price of $1 million.

You've got $80,000 in prepaid revenue and $30,000 in prepaid expenses. That's a $50,000 adjustment in the buyer's favour, so your real price at closing is $950,000.

Now say it's the other way around, and your prepaid expenses are $50,000 higher than your prepaid revenue. Your real price at closing is $1,050,000.

It's the same headline figure of $1 million. But there's a 10% gap between the two outcomes. That can be huge when you're selling your life's work.

Where Founders Get Caught Out

The first is the accounting behind it.

Most of us run our agencies off the bank balance. The difference between cash you've collected and revenue you've actually earned doesn't come up until a buyer's accountant puts it in front of you.

The second is not knowing the real value of what you're sitting on.

If you don't know your number, it's really hard to defend it. And it's even harder to know if the adjustment on the table is fair.

Run the Numbers Before the Process

Most deals are done on positive terms. Both sides are excited about the future.

By the time you're working through adjustments, the LOI is signed and you both want the deal done. More than likely, you'll be working together once it closes.

So be firm on the numbers, but don't burn the bridge getting there.

If you're planning to sell, be aware of what you're creating between now and settlement. Both the assets and the liabilities.

Say you're selling in a year. In two months, you sign a big client for three years of work at $30,000, paid upfront.

By settlement, there's still roughly two years of work to deliver. That's around $20,000 the buyer will ask for at closing, so they can deliver on that promise.

Don't let it stop you from signing the client. Just run the numbers, so you know what to expect.