Deal Autopsy: The Acquisition That Nearly Collapsed Over a Working Capital Dispute Nobody Saw Coming
All details in this account have been anonymised. The business, the sector, and the individuals involved are not identifiable. The mechanics, the mistakes, and the lessons are completely real.
This is the kind of deal story that does not make it into textbooks. It was not a dramatic fraud. There was no dishonest seller and no reckless buyer. Both parties acted in good faith throughout. And yet the deal nearly collapsed — twice — because of a working capital dispute that nobody had properly thought through when the heads of terms were signed.
If you are planning to buy a business, or if you are advising someone who is, this one is worth reading carefully.
The Business and the Deal
The target was a B2B services business in the North of England. Consistent revenue of just under £2.8m, EBITDA of approximately £420k on a normalised basis, and a management team that was credible and largely in place. The owner had built it over fourteen years and wanted to step back — his motivation was genuine, his timeline was reasonable, and the business was genuinely well-run.
The deal was structured as a share purchase at a headline price of £1.85m — a shade under 4.5x normalised EBITDA. The buyer was an experienced operator making their second acquisition, funded through a combination of personal equity, a senior debt facility from a regional bank, and a modest vendor loan of £150k.
Heads of terms were agreed within three weeks of first meeting. Due diligence commenced the following month. Everything looked orderly.
Where It Started to Unravel
The heads of terms included a working capital peg — as they should. The agreed peg was £310,000. This figure had been proposed by the seller's accountant and accepted, with relatively little challenge, by the buyer's side.
The problem became apparent six weeks into financial due diligence, when the buyer's accountant began building a working capital model from the monthly management accounts. What emerged was uncomfortable.
The £310,000 peg had been calculated using the year-end balance sheet position. But this business had a pronounced seasonal working capital cycle. Year end fell in March — a point in the year when the debtor book was historically at its lowest, because Q4 (January to March) was the quietest trading quarter. The working capital position in the summer months, when the business was most active and billing most heavily, was consistently £80,000 to £110,000 higher than the year-end figure.
In other words, the peg had been set at the most favourable point in the working capital cycle, not at the normalised mid-cycle position. And because completion was scheduled for August — the middle of the business's peak trading period — the likely working capital at completion was going to be materially above £310,000.
Mechanically this meant the buyer would pay more than the agreed headline price. Approximately £85,000 to £95,000 more, based on the model.
The Dispute
The buyer's accountant raised this formally. The seller's accountant pushed back.
Their position: the peg had been agreed. It was in the heads of terms. It reflected the audited year-end balance sheet. If the buyer did not like the timing of completion, the solution was to move the completion date, not to renegotiate the peg.
The buyer's position: the peg was not representative of the normalised working capital position. The seller had effectively proposed a peg at the lowest point in the cycle — whether intentionally or not — and the buyer was not prepared to pay for working capital that exceeded the underlying business requirement.
Both positions had some commercial logic. Neither was entirely wrong. And for three weeks, the deal sat in an uncomfortable place where neither side was prepared to move and completion looked genuinely at risk.
What Made It Worse
Several things compounded the problem — all of which were avoidable.
The heads of terms had not defined what working capital meant. The document referred to a peg of £310,000 but did not specify which line items were included in the calculation, how stock was to be valued, or whether inter-company balances were included or excluded. When the two accountants started building their respective models, they were not working from the same definition. That produced two different numbers for the same month-end position — which added an additional layer of disagreement on top of the fundamental timing dispute.
The seller had moved completion by three weeks during the due diligence period — for reasons unrelated to the working capital issue — which pushed it deeper into the summer peak. Nobody had flagged the working capital implications of that timing change when it was agreed.
And critically, neither adviser had flagged the seasonal working capital cycle during the heads of terms negotiation. The buyer's adviser had not asked for monthly working capital data before the peg was agreed. The seller's adviser had proposed a peg based on the year-end balance sheet without volunteering that it represented the low point in the cycle. Both sides had acted within the letter of their roles. Neither had asked the question that would have prevented the dispute.
How It Was Resolved
Resolution came through a combination of commercial pragmatism and the intervention of both sets of principals — the buyer and the seller dealing directly, rather than through their accountants, who had by this point somewhat entrenched their respective positions.
The agreed resolution had three elements:
The working capital definition was formalised in an agreed schedule attached to the share purchase agreement — every line item specified, stock valuation method defined, inter-company balances excluded
The peg was revised upward to £365,000 — splitting the difference between the two positions and reflecting a more representative mid-cycle average rather than the year-end low
The purchase price was reduced by £30,000 to reflect the seller's acknowledgement that the original peg proposal had not been representative, without either side admitting error formally
The deal completed five weeks later than originally scheduled. Both parties spent money on additional professional fees they had not budgeted for. The relationship between the two sides was somewhat cooler at completion than it had been six months earlier.
But it completed. And with the benefit of hindsight, both parties recognised that the dispute had been entirely avoidable.
The Lessons — and They Are Specific
Lesson 1: Never agree a working capital peg without monthly data.
A year-end balance sheet gives you one data point. A business with seasonal working capital patterns can look completely different at different points in the year. Before agreeing any peg, request — and review — the month-end working capital position for at least the prior 12 months. The average of those 12 positions is a far better basis for a peg than a single year-end figure. If the seller resists providing monthly data at heads of terms stage, that resistance is itself a signal worth noting.
Lesson 2: Define working capital precisely in the heads of terms, not just in the SPA.
The definition of working capital sounds like a legal drafting detail. It is not. It is a commercial matter that should be agreed at heads of terms stage — before either side has spent significant money on advisers. A working capital definition that includes stock at cost, excludes inter-company balances, and lists every category of debtor and creditor that is included prevents an enormous amount of subsequent disagreement. If your heads of terms do not specify the definition, fix that before you proceed.
Lesson 3: When completion timing changes, reassess every variable that is timing-sensitive.
A three-week delay to completion sounds minor. In a business with a pronounced seasonal working capital cycle, it can change the completion accounts position by six figures. Every time the completion date moves — for whatever reason — run through the implications for working capital, completion accounts, and any other mechanics that are time-dependent. This takes an hour. Not doing it can cost significantly more.
Lesson 4: Adviser entrenchment is expensive. Deal with disputes principal to principal.
Once two sets of accountants have formally set out their opposing positions in writing, it becomes very difficult for either to move without appearing to have capitulated. In this deal, resolution came quickly once the buyer and seller sat down directly and talked commercially about what a fair outcome looked like. Neither of them had the same attachment to the technical positions their advisers had taken. If you find yourself in a dispute like this one, consider whether a direct conversation between the principals — before the written positions harden — might be more productive than another round of adviser correspondence.
Lesson 5: The peg negotiation is part of the price negotiation.
This is perhaps the most important lesson. Working capital mechanics are not administrative detail. They are part of the economics of the deal. A seller who proposes a low peg is effectively reducing the consideration they will receive at completion — but only if the buyer understands the mechanics well enough to challenge it. A buyer who accepts a peg without analysis is paying for working capital they may not need. Treat the peg with the same commercial rigour you apply to the headline price. The two are directly connected.
What Good Looks Like
A well-structured working capital process in a UK SME acquisition looks like this:
Monthly working capital data requested and reviewed before heads of terms are agreed
Working capital peg set at the 12-month average, adjusted for any known seasonal or structural changes
Definition of working capital agreed in heads of terms — not left to the SPA negotiation
Completion accounts mechanism specified — locked box or completion accounts, and the timeline and process for each
A clear dispute resolution process for completion accounts disagreements — including a named independent accountant to arbitrate if the parties cannot agree
Any timing changes to the completion date reviewed immediately for working capital implications
None of this is complex. All of it requires discipline — particularly in the early stages of a transaction when momentum is building and there is pressure to move quickly. The deals that complete most cleanly are the ones where the buyers and their advisers slow down at the heads of terms stage and get the mechanics right before the process accelerates.
The Underlying Pattern
This deal is not unusual. Working capital disputes are one of the most common sources of post-heads-of-terms friction in UK SME acquisitions — and the vast majority of them are avoidable with better upfront diligence and more precise documentation.
The pattern is almost always the same: a peg agreed too quickly, on insufficient data, with an incomplete definition, and a completion timing that nobody checked against the working capital cycle. The dispute that follows is predictable in retrospect and preventable in advance.
If you are preparing to buy a business, or if you are advising on a transaction, make the working capital conversation an early priority — not an afterthought. It is one of the areas where careful thinking at the start of a process pays the most consistent dividends.
Learn From Every Deal — Including the Ones That Nearly Failed
The best M&A education does not come from theory. It comes from deals — what went wrong, why, and what a different approach would have produced. Every deal autopsy in this series is drawn from real experience, with the same objective: to give acquisition entrepreneurs and business owners the pattern recognition that usually only comes from having been through it yourself.
Download the Dealwise Due Diligence Red Flag Checklist — which includes a specific section on working capital mechanics — to make sure your next acquisition has the right foundations before heads of terms are signed.
Download the Due Diligence Red Flag Checklist at www.DealwiseAdvisory.co.uk
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