Working Capital Adjustment Disputes: How Post-Closing Price Fights Are Decided

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

A working capital adjustment dispute is decided under the purchase agreement's own procedure: its definition of working capital, its target, its objection deadlines, and the decision maker it names. If the agreement sends disputed items to an independent accountant for a binding decision, California may treat the result as an arbitration award or as an ordinary contract term, depending on what the parties intended. (Code Civ. Proc., § 1280, subd. (a).) Kolmogorov Law, P.C., a business litigation firm in Irvine, represents sellers and buyers in these disputes.

Call (909) 235-6116 or contact us online to discuss a post-closing price adjustment that is in dispute.

What a working capital adjustment dispute looks like

After closing, the buyer sends a closing statement. It says the company's working capital on the closing date was below the agreed target, and it asks the seller to pay the difference or release it from escrow.

The mechanism behind the letter is a price term. Under such a clause, the price assumes the business will arrive with an agreed level of working capital, meaning current assets less current liabilities as the agreement defines them. The parties fix a target, estimate the figure at closing, and true it up afterward. A shortfall against the target reduces the price and a surplus raises it.

The disagreement may be about method. One side has reclassified an account, written down inventory, added a reserve, or accrued a liability, and the other side says the business never kept its books that way.

Start with the definitions in the purchase agreement

The adjustment is a contract term, and clear and explicit contract language governs. (Civ. Code, § 1638.) The whole agreement is read together, each clause helping to interpret the others. (Civ. Code, § 1641.) Read three parts of the document first.

The definition of working capital. It lists what counts and what does not. Check how it treats cash, debt, taxes, and deferred revenue.
The accounting standard. An agreement may call for generally accepted accounting principles, for the seller's past practice, or for both in a stated order. Which one controls bears on whether a new reserve is allowed.
The reference materials. If the agreement attaches a sample calculation or a list of specific policies, a closing statement that departs from the exhibit is open to objection.

The deadlines in the adjustment clause

Read the adjustment clause for its own clocks and for what it says happens when one is missed. Check each step.

When the buyer must deliver the closing statement.
How long the seller has to review it, and what access to the books and work papers the seller gets.
When a written dispute notice is due, and whether it must identify each disputed item and amount.
Whether items left out of the notice are treated as accepted.
When either side may submit what remains to the accountant.

If the clause says the statement becomes final when no timely dispute notice is given, expect the other side to rely on that sentence. A court starts from the words of the clause.

The independent accountant: expert or arbitrator?

Where the clause sends unresolved items to an accounting firm, read how it describes the firm's role. It may confine the firm to the items in the dispute notice, and it may say the firm acts as an expert and not as an arbitrator.

Whether the process is an arbitration is a question of California law and of what the parties intended. The arbitration statute defines an agreement to include agreements providing for valuations, appraisals, and similar proceedings. (Code Civ. Proc., § 1280, subd. (a).) The Court of Appeal has read that language to bring audits and other independent examinations within the arbitration law, without requiring a formal hearing.

That case arose from the sale of a controlling interest in a company. An accounting firm examined the balance sheet for adjustments affecting the price, and the agreement made its audit conclusive and binding. The court held that an agreement for a binding valuation is not automatically an agreement to arbitrate. The parties must have intended arbitration, and where the clause is ambiguous that intent is a question of fact. (Coopers & Lybrand v. Superior Court (1989) 212 Cal.App.3d 524, 534, 537-538.)

The classification has consequences. If the process is an arbitration, the result can be confirmed as a judgment and ordinarily attacked only on narrow statutory grounds, usually within 100 days, as our page on confirming or vacating an award explains. If it is not, the determination is generally enforced as a term of the contract through an ordinary lawsuit.

Price adjustment or indemnity claim?

The same facts can sometimes be framed two ways. Overstated receivables can be a working capital shortfall, or a breach of the seller's representation about the financial statements.

Which route applies depends on what the agreement says about each. Compare the two on four points: what each covers, who decides it, whether a threshold or ceiling on recovery applies to one and not the other, and what notice and deadline each requires. A seller facing an adjustment claim may answer that the adjustment measures the change in working capital under consistent methods and was not meant to correct the historical books.

Check also for a clause barring double recovery. The accountant's authority comes from the adjustment clause, so read which disputes it submits. Our pages on purchase agreement disputes and escrow and holdback claims cover the indemnity side.

If you are the seller

Calendar the dispute deadline the day the statement arrives. Ask in writing for the work papers and for access to the accounting staff, and note any refusal.

Compare the statement with the way the books were kept before closing. Look for accounts moved between categories, reserves that did not exist before, and events after closing used with hindsight. Object item by item, with an amount for each.

If you are the buyer

Deliver the statement on time and build it from the agreement's definitions, with support for every change from the estimate.

Decide early which items are adjustment items and which are indemnity claims, and give the indemnity notice the agreement requires. One notice may not do both jobs.

Be careful with self-help. Withholding an earnout or a note payment to cover a disputed adjustment depends on the agreement's terms, discussed on our page about setoff.

What to bring to the first meeting

The purchase agreement with its exhibits, schedules, and any sample working capital calculation.
The estimated and final closing statements and all supporting schedules.
The dispute notice and every response, with proof of delivery dates.
Monthly balance sheets for the two years before closing.
The escrow agreement, if any part of the price is held back.

Frequently asked questions

The buyer of my company says working capital was short and wants $300,000 back. How are these disputes decided?

By the adjustment clause in your purchase agreement. Check the period it gives you to review the closing statement and the form of dispute notice it requires. If the clause sends unresolved items to an independent accounting firm, California law asks whether the parties intended an arbitration. If they did, the result is reviewed like an arbitration award. If not, it is enforced as a contract term.

We bought a company and the closing balance sheet overstated receivables. Should we use the price adjustment or make an indemnity claim?

It depends on the agreement. Under California contract law the clause's own wording controls. Compare what each route covers, who decides it, whether a threshold or ceiling on recovery applies, and what notice and deadline each requires. Check for a clause barring double recovery, and give each notice the agreement calls for within its own deadline.

What is a working capital adjustment?

It is a term in a business purchase agreement that raises or lowers the price after closing. The parties compare the working capital actually delivered with an agreed target and pay the difference. In a California dispute, the agreement's definitions and accounting standard decide which accounts are counted and how they are measured.

Is the independent accountant's decision final?

That depends first on whether the agreement makes it binding. California's Court of Appeal has held that a clause for a binding valuation is not automatically an arbitration agreement, and that the parties' intent controls. If the process is an arbitration, a court can ordinarily set the result aside only on narrow statutory grounds. If not, it is enforced as a contract term.

What happens if I miss the deadline to dispute the closing statement?

If the clause says the statement becomes final and binding absent a timely dispute notice, a California court will generally apply that language as written. Possible responses include waiver by the other side, denial of the access the agreement promised, or fraud. Each depends on the facts, so act as soon as the lapse is found.

Talk to a California breach of contract attorney

If a closing statement or dispute notice is on your desk, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located in Irvine, California. Related reading: our breach of contract practice page and our page on purchase agreement disputes.

This page provides general information about California law and is not legal advice. Outcomes depend on the purchase agreement, the accounting records, and the decision maker.