If you are preparing to sell your company, there is one concept that can quietly move hundreds of thousands or even millions of dollars in your deal: true up.
Most sellers focus on valuation multiples, EBITDA, and headline price.
Sophisticated buyers focus just as much on post closing mechanics. And the true up is one of the most important of those mechanics.
Let us break it down in plain English.
What Is a True Up
A true up is a post closing adjustment to the purchase price of your business based on agreed financial targets, usually working capital.
Here is how it typically works:
Before closing, buyer and seller agree on a “target working capital” number.
This is the amount of short term assets minus short term liabilities required to operate the business normally.
If at closing your working capital is higher than the agreed target, you receive more money.
If it is lower than the agreed target, the buyer receives money back.
That adjustment is the true up.
It is designed to ensure the buyer receives the business in a normalized financial condition.
It is not designed to punish you.
But if handled incorrectly, it absolutely can.
Now let us go deeper.
A true up is not about re negotiating value.
It is about aligning expectations.
Buyers assume that when they acquire your company, they are stepping into a functioning machine.
That machine requires fuel. In financial terms, that fuel is working capital.
If you deliver the business with less fuel than expected, the buyer must inject cash immediately after closing.
The true up compensates them for that gap.
If you deliver more fuel than required, you should be paid for the excess.
The important nuance is that a true up is governed entirely by definitions.
How working capital is defined in the purchase agreement determines the outcome.
Small wording differences around accruals, reserves, deferred revenue, prepaid expenses, or inventory valuation can shift the calculation meaningfully.
Two agreements can reference working capital and produce very different dollar outcomes simply because the definitions are drafted differently.
Another critical point is timing. Most true up calculations are finalized 60 to 120 days after closing, once the buyer prepares a closing balance sheet.
That means part of your proceeds may sit in escrow or remain subject to adjustment until the calculation is completed.
Sellers who do not understand this dynamic are often surprised when funds are temporarily withheld or adjusted after they believed the deal was done.
In sophisticated transactions, the true up becomes a negotiation of accounting philosophy.
Is the business being transferred on a normalized historical basis, or is the buyer embedding conservative forward looking assumptions into the definitions?
That distinction matters.
A conservative bias in drafting almost always benefits the buyer.
At Elkridge Advisors, we model multiple true up outcomes before you ever sign a Letter of Intent so there are no surprises later.
Why Buyers Care So Much About True Up
Buyers do not want to overpay because a seller temporarily boosted cash or delayed payables before closing.
Imagine a company with a $10,000,000 purchase price. If working capital is $750,000 below target at closing, the buyer will typically deduct $750,000 from the final proceeds.
From their perspective, they paid for a business that should operate without injecting additional cash.
Professional buyers see true up as protection.
Inexperienced sellers see it as fine print.
That difference in perception often costs sellers real money.
Now let us look at this through the buyer’s lens.
When a buyer values your company, they are underwriting future cash flows.
They assume the business will continue operating the day after closing without disruption.
If accounts receivable are lower than normal, if inventory has been run down, or if payables have been stretched beyond customary terms, the buyer is inheriting a short term liquidity problem.
Even if EBITDA looks strong, the operational engine may be underfunded.
True up provisions protect against what buyers call value leakage.
Without a true up, a seller could theoretically collect receivables aggressively before closing, slow down payments to vendors, reduce inventory purchases, and deliver a balance sheet that looks lean but is not sustainable.
The buyer would then need to inject capital immediately to restore normal operations.
That injection effectively increases the real purchase price beyond what was negotiated.
Institutional buyers and private equity groups are especially sensitive to this because they operate under disciplined capital allocation models.
If they agree to a $15,000,000 acquisition, they expect that number to reflect the full economic cost of the business in normalized condition.
Any unexpected working capital gap distorts their internal rate of return calculations and can reduce the attractiveness of the investment to their own investors.
There is also a risk management dimension.
Buyers use true up mechanisms to reduce disputes about whether a seller manipulated short term accounts prior to closing.
By agreeing in advance on a target and a calculation methodology, both parties create an objective framework.
That framework reduces the likelihood of litigation and replaces subjective accusations with arithmetic.
Finally, buyers care about signaling.
A seller who resists reasonable true up provisions can raise concerns about financial transparency.
On the other hand, a seller who understands the mechanics and negotiates intelligently signals sophistication and confidence in their numbers.
That alone can strengthen buyer trust during due diligence.
We help you understand what buyers will demand before negotiations even begin.
That gives you leverage instead of vulnerability.
How True Up Impacts Your Net Proceeds
Let us be direct.
Your deal is not the headline number. Your deal is what lands in your account.
Consider this simplified example:
Purchase price: $8,000,000
Working capital shortfall: $400,000
Debt adjustment: $600,000
Your actual proceeds may fall significantly below the number you celebrated.
True up mechanics often interact with cash free debt free provisions, indemnity escrows, holdbacks, and other purchase price adjustments. These elements can compound.
Now let us explore how that compounding effect really works.
Most transactions are structured on a cash free debt free basis.
That means the agreed purchase price assumes a normalized level of working capital, zero excess cash retained by the seller, and no outstanding debt.
When you layer a true up adjustment onto this framework, you are effectively reconciling the difference between theoretical assumptions and financial reality at closing.
If working capital is below target, the adjustment reduces the purchase price dollar for dollar.
If debt is higher than anticipated, that amount also reduces proceeds.
If a portion of the price is placed into escrow to cover indemnities, that cash is temporarily unavailable.
While each component may seem reasonable on its own, together they can materially change the liquidity event you thought you were achieving.
There is also a psychological component.
Sellers tend to anchor on the enterprise value or headline purchase price during negotiations.
However, buyers and their advisors build detailed closing statements that calculate equity value after every adjustment.
That equity value is what you actually receive.
In larger transactions, the true up calculation can also influence how funds are allocated between shareholders.
If there are multiple owners, and if working capital adjustments are significant, disputes can arise internally about how reductions or increases are distributed.
Understanding this in advance is critical for alignment among partners.
Another subtle impact relates to taxes.
While the true up itself is generally treated as an adjustment to purchase price, the timing of when adjustments are finalized can affect how proceeds are reported and allocated across tax years.
A reduction of $1,000,000 finalized after year end may have planning implications depending on your broader tax strategy.
We run full waterfall analyses for sellers so they see their real net proceeds under multiple scenarios before signing definitive agreements.
We model base case, downside, and upside true up outcomes so there are no surprises when the closing statement arrives.
Common Seller Mistakes With True Up
Over the years, we have seen sellers make costly errors.
Agreeing to vague definitions of working capital is one of the most common.
If the purchase agreement simply references “GAAP” without specifying historical consistency, buyers may apply more conservative interpretations after closing.
That shift in interpretation can reduce closing working capital even if your accounting practices never changed.
Another frequent mistake is accepting buyer prepared historical averages without independent verification.
Buyers often calculate the working capital target using their own methodology.
If you do not rebuild that analysis yourself, you may accept a target that embeds assumptions unfavorable to you.
Small normalization decisions, such as how to treat prepaid expenses or accrued bonuses, can move the target by hundreds of thousands of dollars.
Many sellers also underestimate how aggressively buyers will scrutinize balance sheet accounts during the true up period.
Items that were never questioned in annual audits suddenly become negotiation points.
Inventory reserves, warranty accruals, bad debt allowances, and deferred revenue balances can all be re-evaluated.
If your documentation is weak or inconsistent, you are negotiating from a defensive position.
Timing mistakes are equally damaging.
Some sellers focus heavily on income statement performance in the months leading up to closing while neglecting balance sheet discipline.
Accelerating collections or delaying vendor payments to improve cash flow optics can unintentionally distort working capital levels.
When the closing balance sheet is prepared, those distortions often reverse and trigger downward adjustments.
There is also the mistake of assuming the true up will be immaterial relative to total deal value.
In reality, buyers often devote significant analytical resources to this section of the agreement precisely because it is mechanical and enforceable.
It is easier to negotiate definitions than to renegotiate valuation multiples.
Sellers who overlook this dynamic can lose meaningful value without realizing it until after closing.
In one case, a seller assumed the adjustment would be around $100,000.
It finalized at over $1,200,000 because accrual definitions were not tightly drafted.
True up is not dangerous.
Poor preparation is!
If you want to avoid preventable losses, work with advisors who negotiate these provisions every week.
Schedule a strategy call with Elkridge Advisors before your process begins.
How to Prepare for a True Up Before Selling
Preparation creates leverage.
Here is what sophisticated sellers do 6 to 12 months before going to market.
They normalize working capital trends, remove personal expenses from operating accounts, clean up aged receivables, resolve disputed payables, standardize accrual accounting, and build clear monthly balance sheet reporting.
The stronger and cleaner your financial reporting, the less room buyers have to reinterpret numbers.
Buyers pay higher multiples for businesses with disciplined financial controls. True up exposure shrinks when your accounting discipline grows.
Now let us expand on what real preparation looks like in practice:
You need visibility.
Many founders can recite their EBITDA margin instantly but cannot clearly explain monthly working capital fluctuations.
Before going to market, you should understand how receivables, inventory, and payables move throughout the year and why.
If working capital spikes every September due to inventory builds, that needs to be documented and supported with historical data. When you can explain patterns proactively, you control the narrative instead of reacting during diligence.
Consistency is critical.
Buyers care less about whether your numbers are perfect and more about whether they are consistent.
If your accrual methodology changes year to year, or if reserves are adjusted opportunistically, buyers may impose their own conservative standards in the true up calculation.
Establishing consistent accounting policies and sticking to them reduces the risk of post closing reinterpretation.
Stress test your closing scenario.
We often model hypothetical closing dates to estimate what working capital would look like at different points in the year.
This helps identify risk windows where closing could trigger a downward adjustment.
With that insight, you can either negotiate the target differently or strategically manage timing.
Eliminate noise.
Old shareholder loans, related party transactions, unusual prepaid expenses, and legacy balance sheet items create confusion. Even if they are economically small, they complicate the calculation and increase dispute risk. Cleaning these up before going to market makes the true up calculation cleaner and faster.
Prepare documentation as if you expect disagreement.
That does not mean you anticipate conflict.
It means you are ready for scrutiny.
Detailed schedules supporting inventory counts, receivable aging, and accrual assumptions can prevent minor issues from escalating into six figure adjustments.
If you are considering a sale in the next 12 to 36 months, the time to prepare is now.
Final Thoughts: Control the Details, Control the Outcome
True up provisions are not glamorous.
They do not show up in headlines.
But they directly impact your final payout.
At Elkridge Advisors, we believe sophisticated preparation leads to stronger exits. We do not just negotiate prices. We negotiate structure, definitions, mechanics, and post closing economics.
The sellers who walk away satisfied are not the ones who chased the highest multiple. They are the ones who controlled the details.
Let us leave you with one important perspective.
In nearly every transaction, valuation gets the attention and true up gets the footnote.
Yet in practice, true up language can quietly transfer significant economic value from seller to buyer if it is not carefully structured.
It is one of the few areas in a deal where precision in wording directly translates into dollars in your bank account.
Sophisticated buyers understand this.
Their legal and accounting teams analyze the working capital definition line by line.
They model best case and worst case scenarios.
They stress test assumptions.
As a seller, you deserve the same level of rigor on your side of the table.
True up should never be an afterthought. It should be modeled, negotiated, and aligned with how your business actually operates.
When handled properly, it creates fairness and clarity. When handled casually, it creates friction and financial leakage.
At Elkridge Advisors, we approach every transaction with a simple principle.
Structure drives outcome.
We protect not only your valuation multiple, but also the mechanics that determine what you truly receive.
Because in M&A, details move money!
