Working Capital Adjustment in a Veterinary Practice Sale (2026 Guide)

Key takeaways

• The working capital adjustment is a dollar-for-dollar change to your proceeds. If the net working capital you deliver at closing is below the agreed target (the “peg”), the buyer deducts the shortfall from your purchase price — no negotiation, no goodwill credit.
• Per SRS Acquiom’s 2026 study of over 1,500 transactions, working capital adjustments now appear in more than 90 percent of private-target M&A deals — up from 50 percent a decade ago. Every serious buyer will include one in their offer.
• The peg is the number you need to negotiate at the LOI stage, before exclusivity locks in your leverage. Buyers set it as high as possible; sellers should arrive with their own trailing 12-month average ready to defend.
• Accounts receivable aging, stale inventory, and deferred revenue from wellness plans are the three components most likely to create a downward adjustment on your practice sale — all correctable before you go to market.
• A working capital collar (tolerance band) of plus or minus $25,000 to $75,000 can prevent an expensive dispute over immaterial differences — and it is a standard ask in a well-represented seller’s draft.

I sat across from an owner last year whose practice had just closed. He’d negotiated hard on the headline number, and by any measure it was a strong result — exactly where we’d hoped the competitive process would land.

Ninety days later his attorney called with a problem. The buyer had delivered the closing balance sheet, and the working capital came in below the agreed target.

The shortfall was just over $280,000. That amount came straight out of the final disbursement, dollar for dollar, before a cent arrived in his account.

He hadn’t seen it coming. Not because he wasn’t smart — he’d been running a well-run, profitable practice for 23 years.

He hadn’t seen it because the working capital adjustment is the clause in every purchase agreement that most sellers never fully understand until after it lands on them.

This is the piece I wish every vet owner would read before they sign a letter of intent. The working capital adjustment in a veterinary practice sale is a mechanism that reconciles the actual short-term financial fuel in the practice at closing against a pre-agreed target. Buyers use it to ensure that the practice can operate from day one without them injecting additional capital.

Sellers who understand it — and who negotiate the target correctly — protect a meaningful portion of their proceeds. Those who treat it as fine print after the headline number is agreed routinely hand back money they didn’t know they owed.

Here’s what the mechanism actually is, how it works in a vet practice context specifically, and what to do about it before you get to the table.

What is a working capital adjustment in a veterinary practice sale?

Net working capital (NWC) is the short-term liquidity of the practice: current assets minus current liabilities, with cash and debt excluded. The formula is simple.

Add up accounts receivable, inventory, and prepaid expenses on the asset side. Subtract accounts payable, accrued wages, and other short-term operating liabilities.

What remains is the working capital figure.

The adjustment works like this: before closing, buyer and seller agree on a target level of working capital called the peg — the negotiated amount of NWC that must be present in the practice at closing so the buyer can operate without interruption. At closing, a preliminary NWC figure is calculated and compared to the peg.

If actual NWC is higher than the peg, the buyer pays the surplus to the seller. If actual NWC is below the peg, the shortfall reduces the purchase price dollar for dollar.

The reconciliation is not final at closing. A post-closing true-up — the process of finalizing the actual closing NWC against the peg once all accounts are settled — typically runs 60 to 120 days later.

Per Stout’s analysis of M&A post-closing adjustments, the buyer prepares a draft closing balance sheet, the seller reviews it and can object, and any unresolved items go to a mutually agreed independent accounting firm for binding resolution.

Most veterinary practice sales are structured on a cash-free, debt-free basis: the seller keeps all the cash and pays off all the funded debt before closing. Working capital sits in the middle — it is neither kept by the seller nor extinguished at close.

It must be delivered to the buyer at the agreed level. That is why the peg matters.

Why the working capital adjustment in a 2026 vet deal can reduce your proceeds more than you expect

Per SRS Acquiom’s 2026 M&A Working Capital Purchase Price Adjustment Study — which analyzed over 1,500 private-target acquisitions valued at more than $385 billion — working capital purchase price adjustments now appear in more than 90 percent of private-target M&A transactions, up from roughly 50 percent a decade ago. Every sophisticated buyer in the veterinary space, PE-backed or otherwise, includes one.

It is not a sign of distrust. It is standard practice, and assuming your deal will skip it is a planning error.

The median holdback for working capital adjustments runs at roughly 1 percent of transaction value per SRS Acquiom’s data. On a $3 million practice sale, that is $30,000 held back pending the true-up.

On a $7 million deal, $70,000. About 24 percent of claims exceed 1 percent of transaction value, meaning roughly 1 in 4 deals sees a working capital dispute that reaches six figures.

Working capital disputes are also the most common source of post-closing friction. Lincoln International, which tracks NWC disputes in detail, notes that post-close working capital calculations are frequently intended to be straightforward but become contentious when accounting judgment, documentation, and contractual interpretation intersect.

The math on a shortfall is not complicated. Suppose the peg is $500,000.

The buyer’s accountants calculate closing NWC at $320,000. The $180,000 shortfall comes directly off your proceeds.

The buyer retains it from the working capital holdback — a portion of the purchase price held back by the buyer at closing, not in a third-party account, but retained by the buyer — to cover exactly this scenario. Any holdback remaining above the shortfall is released to you.

What counts as working capital in a veterinary practice

Understanding the components is where preparation starts. In a typical vet practice asset purchase, the working capital basket includes these items:

Component	In or Out of Working Capital	Typical vet practice context
Accounts receivable (net)	In	Client balances, CareCredit, third-party payer balances — net of bad debt reserve
Inventory	In	Pharmaceuticals, vaccines, surgical supplies, retail products
Prepaid expenses	In	Prepaid insurance, software subscriptions, prepaid rent
Accounts payable	Out (liability)	Vendor payables, distributor invoices due
Accrued payroll and benefits	Out (liability)	Wages earned but not yet paid, accrued PTO
Cash	Excluded	Seller keeps all cash in a cash-free deal
Funded debt	Excluded	Lines of credit, equipment loans — seller pays off at close
Deferred revenue (wellness plans)	Treated as liability	Obligations for pre-paid services not yet rendered
Client deposits	Treated as liability	Pre-paid amounts for future services — obligation follows the cash

Two items deserve special attention for veterinary practices specifically.

Accounts receivable aging. Per DVM360’s guidance on practice receivables, accounts receivable in a small animal hospital should generally not exceed 2.5 percent of annual gross revenue, and any AR balance where more than 30 percent of the total is over 90 days old signals weak controls. A buyer’s accountants will apply exactly this lens.

Receivables older than 90 days may be written down to zero in their closing working capital calculation even if your books carry them at face value. The CPA Journal’s analysis of working capital traps documents exactly this pattern: the peg is set using one methodology, the closing NWC is calculated using stricter reserves, and the gap produces a surprise shortfall the seller never modeled.

Deferred revenue from wellness plans. Many vet practices sell annual wellness packages — clients pay upfront, and the practice delivers services across the year. Those advance payments sit on the balance sheet as deferred revenue: a liability representing services not yet rendered.

Per Lutz M&A Solutions’ analysis of NWC mechanics, deferred revenue tied to customer deposits is often treated as a debt-like item in the working capital calculation because the cash was collected but the obligation follows the buyer. A practice running $150,000 of active wellness plan prepayments has $150,000 of obligation to deliver — and that can meaningfully suppress the closing NWC figure against a peg that didn’t account for it.

How the working capital peg is set in 2026 — and why buyers want it high

The peg is set before closing, usually established or at least described in the letter of intent and formally drafted into the purchase agreement. The most common methodology is the trailing 12-month average of monthly NWC — the average working capital level across each of the prior 12 monthly balance sheet dates, normalized to remove one-time anomalies.

Per Schneider Downs’ guidance on NWC peg mechanics, the starting point is the accounting-based working capital calculation, adjusted to eliminate cash, funded debt, owner payables, any unusual large prepayments, or temporary delays in paying vendors. The result is intended to reflect the normal short-term liquidity the practice requires to operate.

Buyers and sellers both sign off that the peg represents what a normally-functioning practice should have at closing.

The incentive misalignment is built into the structure. As Kroll’s M&A working capital guidance notes, the buyer wants the highest possible peg and the seller wants the lowest.

A higher peg means a smaller closing adjustment in the seller’s favor but a larger potential downside adjustment if NWC at close comes in short. A lower peg gives the seller more room to deliver exactly the peg and collect any surplus above it.

Most sellers accept the buyer’s proposed peg without running their own calculation. That is the single most correctable mistake in the whole process.

A seller who arrives at the LOI stage with a trailing 12-month analysis already done — broken out month by month, with one-time items identified and normalized — can defend a lower peg or at minimum narrow the range of dispute.

Some deals use a 6-month average rather than 12. If the practice had an unusually strong second half (high receivables, lower payables), a shorter lookback can push the peg up meaningfully.

Others use a specific balance-sheet date rather than an average. In any of these cases, the methodology is as important as the number.

How to negotiate the working capital adjustment in your favor

The leverage on this conversation exists almost entirely at the LOI stage. Once you sign the letter of intent and enter exclusivity, the working capital definition and peg are largely settled — buyers will resist reopening them because they’ve already spent legal and diligence resources assuming those terms.

Here is where preparation creates real value.

Get your own trailing average before the LOI is signed. Calculate monthly NWC for each of the prior 12 to 18 months. Identify any months that had unusual spikes in receivables (end of a large insurance claim) or unusual dips in payables (you paid ahead of terms before year-end).

Normalize those out. The clean trailing average is your anchor for the peg negotiation.

Negotiate a collar. A working capital collar — a tolerance band around the peg, commonly plus or minus $25,000 to $75,000, within which no adjustment is triggered — is standard in well-drafted purchase agreements. Thompson Coburn’s analysis of working capital pitfalls identifies the absence of a collar as one of the most common sources of unnecessary dispute.

A $30,000 deviation from a $500,000 peg is functionally immaterial, but without a collar it still triggers a dollar-for-dollar adjustment and potentially a legal dispute.

Define the basket precisely. The definition of “net working capital” in the purchase agreement needs to list exactly which balance sheet accounts are included, which accounting policies govern the closing calculation, and what “consistent with past practice” means operationally. Per Thompson Coburn, vague purchase agreement definitions are the single largest source of post-closing NWC disputes.

Ambiguity in what counts as “inventory” or how the doubtful accounts reserve is computed can produce a six-figure dispute later.

Address deferred revenue early. If your practice runs wellness plans or annual care packages, get the treatment of that deferred revenue agreed in the LOI or at least flagged for the purchase agreement. Decide whether it is treated as a debt-like item outside the NWC calculation or included as a working capital liability.

Either approach is defensible; what creates problems is leaving it to the buyer’s accountants to decide at the closing balance sheet stage.

Clean up your receivables before diligence begins. Write off balances over 90 days that are genuinely uncollectible. Update your bad debt reserve to reflect actual collection experience.

Run a collections effort 60 to 90 days before the process starts. Every dollar you recover on aged balances either raises your NWC toward the peg or reduces the buyer’s ability to apply a downward write-down against your closing NWC.

The post-closing true-up: what happens 60 to 90 days after you sell

Closing day is not the end of the working capital conversation. Within the agreed period after closing — typically 60 to 90 days — the buyer prepares a draft closing balance sheet.

This document is the buyer’s accountants’ calculation of actual NWC at the closing date. The seller has a review period, commonly 30 to 60 days, to accept or object.

Per Stout’s M&A post-closing adjustment guidance, if the parties cannot agree within the objection period, the disputed items go to a neutral independent accounting firm for binding resolution. The firm acts as an expert, not an arbitrator, and its determination is final within the scope of the dispute.

This is why the original purchase agreement language matters so much: the expert can only decide what the contract actually says the question is.

Lincoln International’s research on NWC disputes notes that the proportion of seller-favorable working capital adjustments has risen steadily — from 26 percent of cases between 2010 and 2013 to nearly half of all cases by 2024. Sellers who are well-prepared and well-represented increasingly recover ground in the true-up process that they might once have conceded.

But the best outcome is a clean closing statement that both sides accept without dispute, which is a function of how precisely the peg and methodology were defined months earlier.

A few things to know about the holdback mechanics. In vet practice sales, the portion of purchase price held pending the true-up is held back by the buyer — not deposited with a neutral third party.

At the conclusion of the true-up, any holdback exceeding the final shortfall is released and wired directly to the seller. If the final working capital comes in above the peg, the buyer simply wires the surplus.

The process is bilateral and the resolution is a cash movement between the parties.

How this connects to the rest of your deal

Working capital doesn’t sit in isolation. The overall value of your practice starts with how your practice is valued — the EBITDA multiple and the normalized earnings number.

Working capital then determines whether you actually collect that value at close.

The deal-structure choices you make earlier also interact with working capital. Whether you’re taking all cash at close, carrying an earnout, or retaining equity in a rollover arrangement affects how much of your total consideration is subject to the working capital adjustment.

We cover those structure choices in our guide to selling a veterinary practice and the LOI-stage decisions in our piece on letters of intent in vet practice sales. The tax consequences layer in on top — including how the asset classes are allocated, which we cover in our guide to the tax consequences of selling a veterinary practice.

The buyer type you choose also affects working capital dynamics. PE-backed groups typically use institutional-level due diligence teams and experienced M&A attorneys who will be precise about working capital definitions.

Individual buyers may be less sophisticated on the mechanism, but that cuts both ways — less precision can mean less rigorous enforcement, but also less protection if the process goes sideways. The right context for this conversation is a structured competitive process, where your advisor has seen both scenarios and can compare working capital terms across multiple bids, not just take the first offer’s NWC language as given.

That is exactly what the Elite Selling System is built to do. We hand-select and vet every buyer who gets to bid on your practice — the way a doorman with a velvet rope lets in only the right people — then run a private competitive window inside that vetted group.

Comparing NWC terms across 4 to 6 competing bids in that window is a materially different conversation than sitting across from one buyer trying to explain why their peg is too high. We’ve seen working capital definitions vary by $150,000 or more on the same practice, depending on how deferred wellness plan revenue and aged receivables are treated.

That variance is real money, and you only see it when you have multiple offers in front of you at once.

What to do before you go to market

The preparation is straightforward and mostly financial housekeeping. Start 6 to 12 months before you plan to launch a process.

Pull a monthly NWC report for the prior 18 months. Your CPA can build this from your monthly balance sheets.

Identify the components, clean up the aged receivables, confirm your bad-debt reserve is realistic, and run a physical inventory count so your books reflect what’s actually on the shelf. If you run wellness plans, quantify the deferred revenue balance and think through how you want it treated in a transaction.

At the LOI stage, bring your trailing average to the negotiation as a documented exhibit. Know what a reasonable collar looks like.

Know whether 6-month or 12-month trailing is more favorable given your recent history. Have your attorney review the NWC definition in the purchase agreement before you sign — not after.

The working capital adjustment is one of the items where being prepared creates a clean, uncomplicated closing. The alternative is a 90-day post-closing fight over accounting definitions that both sides should have resolved months earlier.

I’ve sat through both versions. The prepared one is far better.

If you’re approaching a sale and want to understand where your practice currently stands — what your working capital profile looks like, how it compares to the peg a typical buyer would propose, and what the full deal structure might look like for your specific situation — start with a value estimate. It grounds every conversation that comes after it, including this one.

When you are ready, request a free, confidential practice value estimate.

When we prepare a practice for sale, working capital analysis is part of the pre-sale review we run before any buyer sees your numbers. We calculate the trailing NWC, identify the components most likely to be challenged in diligence, and flag the accounts that need cleanup before the process starts.

That preparation is what prevents the 90-day call that surprises owners after closing.

TE’s engagement model is success-based: we are compensated only when a deal closes, and only out of the value we create above what you’d have realized on your own. The working capital conversation is one of the places that gap is most visible — and most preventable.

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Frequently asked questions

What is a working capital adjustment in a veterinary practice sale? A working capital adjustment in a veterinary practice sale is a dollar-for-dollar change to the purchase price based on the difference between the net working capital actually delivered at closing and a pre-agreed target called the peg. Net working capital is current assets — primarily accounts receivable, inventory, and prepaid expenses — minus current liabilities like accounts payable and accrued wages, with cash and debt excluded.

If closing working capital is below the peg, the buyer reduces the purchase price by exactly that shortfall. If it is above the peg, the buyer pays the surplus to the seller.

How is the working capital peg set in a 2026 vet practice sale? The working capital peg is typically set at the trailing 12-month average of monthly net working capital, normalized to remove one-time anomalies. Buyers calculate the peg as high as possible; sellers negotiate it as low as possible.

A well-prepared seller arrives at the LOI stage with their own trailing average already calculated so they can defend or adjust the buyer’s proposed peg rather than simply accepting it. Some agreements use a 6-month average or a specific balance-sheet date, which can favor the buyer if that period had atypically high receivables or low payables.

What components of a veterinary practice count as working capital? In a veterinary practice sale, working capital typically includes accounts receivable (patient and third-party balances outstanding), pharmaceutical and supply inventory, and prepaid expenses on the asset side, minus accounts payable to vendors, accrued payroll and benefits, and other accrued short-term liabilities. Cash is excluded — sellers keep their cash in a cash-free, debt-free deal structure.

Deferred revenue from wellness plans or pre-paid packages is often treated as a liability in the calculation and can meaningfully reduce the NWC figure.

Can a working capital adjustment reduce my sale proceeds after closing? Yes. A working capital adjustment can reduce your final proceeds dollar-for-dollar if your actual closing net working capital is below the agreed peg.

The mechanism works through a post-closing true-up: the buyer prepares a closing balance sheet 60 to 120 days after closing, compares actual NWC to the peg, and any shortfall is recovered from the working capital holdback — a portion of the purchase price the buyer retained at closing for exactly this purpose. Per SRS Acquiom’s 2026 study of over 1,500 transactions, working capital PPAs appear in more than 90 percent of private-target M&A deals today.

How can I negotiate a lower working capital peg when selling my veterinary practice? Negotiate the peg at the LOI stage, before exclusivity locks in your leverage. Calculate your own trailing 12-month average NWC and present it as the baseline.

Push for a collar — a tolerance band of plus or minus $25,000 to $75,000 — so small deviations do not trigger an adjustment. Scrutinize what the buyer includes and excludes: deferred wellness plan revenue, aged receivables over 90 days, and stale inventory can all be contested.

Have your CPA review the proposed NWC definition before you sign.

How does the working capital true-up process work after closing? After closing, the buyer typically prepares a draft closing balance sheet within 60 to 90 days. The seller has a review period — often 30 to 60 days — to accept or object.

If the parties cannot agree, the disputed items go to an independent accounting firm for binding resolution. Per SRS Acquiom, the median PPA holdback is roughly 1 percent of transaction value, and about 24 percent of claims exceed that threshold.

A well-drafted purchase agreement specifies the accounting standards (GAAP consistently applied), the exact items in the NWC basket, and a clear dispute process.

What happens to accounts receivable in a veterinary practice working capital adjustment? Accounts receivable are included in working capital at their net realizable value — the face amount less a reserve for doubtful accounts. Buyers’ accountants will apply an aging analysis and may write down receivables older than 90 days, even if your books carried them at full value.

DVM360 notes that accounts receivable over 90 days older than 30 percent of total AR signals weak internal controls. Cleaning up aged balances before going to market reduces the buyer’s ability to challenge your working capital figure at closing.

Does a working capital adjustment apply in an asset purchase of a veterinary practice? Yes, most veterinary practice asset purchases include a working capital adjustment mechanism. Even though specific assets rather than shares are purchased, the buyer still expects the practice to be operationally funded at closing.

The working capital adjustment ensures the seller delivers the agreed level of receivables, inventory, and short-term liquidity so the buyer can operate from day one without injecting additional capital. The mechanics are the same: peg is set, closing balance sheet is prepared, and any deviation adjusts the price dollar-for-dollar.

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Sources

Industry M&A research — working capital and purchase price adjustments

1. SRS Acquiom. “M&A Working Capital Purchase Price Adjustment Study 2026.” srsacquiom.com
2. SRS Acquiom. “M&A Deal Terms Study 2026.” srsacquiom.com
3. Lincoln International. “Working Capital Adjustments and Tips to Mitigate M&A Disputes.” lincolninternational.com
4. Lincoln International. “How Sellers Are Narrowing the Gap with Buyers in M&A Post-Close Working Capital Adjustments.” lincolninternational.com
5. Capstone Partners. “Pet Sector M&A Update — April 2026.” capstonepartners.com

Legal and accounting analysis — working capital mechanics

6. Schneider Downs. “Understanding the Net Working Capital Peg in M&A Transactions.” schneiderdowns.com
7. Stout. “Post-Closing Working Capital Adjustments: Planning and Drafting Considerations.” stout.com
8. Thompson Coburn LLP. “Working Capital Adjustments: Common Pitfalls.” thompsoncoburn.com
9. BDO. “Net Working Capital Is Vital in M&A.” bdo.com
10. The CPA Journal. “Beware the Working Capital Adjustment Trap.” cpajournal.com
11. Kroll. “Navigating Working Capital in M&A Transactions.” kroll.com
12. Lutz M&A. “Net Working Capital Calculation Dilemma.” lutz.us

Veterinary practice operations and financial benchmarks

13. DVM360. “Working Well with Working Capital Helps Practices Succeed.” dvm360.com
14. DVM360. “Dust Off Your Veterinary Practice’s Accounts Receivable.” dvm360.com
15. AAHA/VMG. “Financial Framework for Practice Management and Accounting, 2025 Edition.” aaha.org