Pre-Closing Dividends and Working Capital Adjustments in M&A Deals

Mgr. Klára Megová
Mgr. Klára Megová
17.4.2026 | ARROWS law firm

When selling a company or an ownership interest, the owners and the buyer must agree on the purchase price and its scope. What may seem like a simple issue in theory often proves in practice to be one of the most complex elements of the transaction. A key role is played by the question of pre-closing dividends and purchase price adjustments based on working capital. This article explains how these mechanisms work and how to avoid the most common mistakes.

The photograph shows experts addressing the issue of adjusting the purchase price.

Pre-closing dividend

The seller often wants to declare a dividend before the transaction is closed and extract as much cash from the company as possible. This is natural—why should they leave financial resources to the buyer that they no longer need? From their perspective, it is their money.

From the buyer’s perspective, however, it is completely different. If the price included a certain level of working capital (operating liquidity) that the buyer believed would be available in the business, they suddenly find themselves in a situation where they must finance that liquidity themselves.

Illustration using a specific example

A company is being sold for CZK 100 million. Based on due diligence, the buyer expects to “take over” the company with working capital of CZK 10 million—i.e., with a certain volume of inventory, receivables, and operating cash.

Two days before the transaction closes, the seller decides to declare a dividend of CZK 5 million and pulls the cash out of the company. The buyer only finds out after signing the agreement. The price they pay, if the agreement is not set up correctly, remains CZK 100 million.

The business they receive will have CZK 5 million less in cash. In effect, the buyer has paid CZK 105 million for something that was supposed to cost CZK 100 million. In Czech practice, this phenomenon is referred to as leakage (value leakage).

Our attorneys in Prague at ARROWS advokátní kancelář monitor very carefully how leakage is defined in the share purchase agreement and what the permitted exceptions are. It is precisely these details that separate fair transactions from those where the seller later ends up in court with the buyer.

The practical risk is that, without an explicit provision in the share purchase agreement, the buyer has no means of protection. The seller may claim that nothing happened—that the dividend is their right and that cash in the business is not an accessory to the purchase price.

It is a legal dispute with all the negative consequences: months of court proceedings in the Czech Republic, legal costs, reputational damage, and most likely a decision that satisfies no one. How can this be prevented? A properly drafted rule in the share purchase agreement. When setting the rules for leakage, dividends, and purchase price adjustments, sale of companies and transaction advisory services are typically involved as well.

How to prevent value leakage?

Option 1: Dividend lock

The agreement contains a clause that the seller may not declare a dividend in the period between signing and closing (between signing and closing).

This option is the simplest but the least flexible—if the transaction drags on for months, the seller effectively loses access to their returns. In a competitive environment, it is mainly feasible for smaller transactions or situations where the seller is motivated to finish quickly.

Option 2: Permitted leakage

The agreement permits dividends up to a certain amount, for example “ordinary dividends within the budgeted range” or “dividends up to CZK X million.” This option balances the interests of both parties—the seller has some access to income, but not unlimited access.

It is necessary for the definition to be very precise, because the word “ordinary” is interpreted in many different ways in disputes. A practical view of how to address “permitted leakage” and the related tax impacts in the documentation is also summarised in the article Transfer of a business interest: Rules, taxes, and risks for 2026.

Option 3: Price adjustment

The agreement allows a dividend without limitation, but the amount of any dividend is deducted from the purchase price. This is the cleanest approach—the buyer does not pay for money that is no longer in the business.

However, it requires a very precise definition of how the calculation is performed to avoid double counting together with the working capital adjustment.

Our attorneys in Prague at ARROWS advokátní kancelář check very thoroughly how the chosen option is built into the share purchase agreement and how it ties into the other parts of the agreement, especially the definition of working capital and the mechanism for its adjustment. One poorly drafted sentence here can cost tens of millions.

Working capital: Definition and complexities

Working capital is a concept that almost every entrepreneur has heard of. It is the difference between current assets (inventory, receivables, cash) and current liabilities (payables, short-term debt). Mathematically, it is simple: Working capital = Current assets – Current liabilities.

In the context of M&A transactions, however, this simple number hides enormous complexity. Our attorneys in Prague at ARROWS advokátní kancelář know from experience that once you start breaking down the specific definition of working capital in the share purchase agreement, disputes arise that would seem absurd if they were not so expensive.

First, let us clarify what is included in working capital and what is not. The answer may seem obvious—“current assets minus current liabilities”—but in practice it is more complicated. We start asking questions:

Is cash included? In a typical transaction, a “cash-free, debt-free” mechanism is commonly used, which means that all cash in the business is treated as a separate item. It is not part of working capital and is dealt with separately. Cash is therefore usually excluded.

Are receivables from shareholders or the owner included? This is usually excluded because it is not part of ordinary operations. For example, if the owner has a loan from the company, it is not typically counted as working capital.

How are provisions calculated? This is a key question. Some companies create a provision for doubtful receivables or inventory. Whether this provision is counted in full or only partially is something that must be explicitly agreed.

What happens with seasonal inventory? If the company is seasonal in nature, for example a construction company that stops working in winter, what working capital should be taken into account? Working capital as of 30 June will look completely different from 30 September. Our Prague-based attorneys at ARROWS encounter situations where the parties argue whether to use an annual average or a specific point in time.

All of these questions must be addressed in the share purchase agreement before signing. If they remain open and you only start calculating the “final balance sheet” after closing, you will trigger a legal war.

Locked box versus completion accounts

Following crises in M&A practice, two main approaches have developed for determining and adjusting the purchase price. Both are used, but they have fundamentally different characteristics.

Locked box mechanism

Under the locked box mechanism, the parties choose a reference date in the past—often the company’s last audited financial position. The purchase price is calculated based on the balance sheet as of that date. From that moment, the price no longer changes. There is no post-closing true-up, no “completion accounts”, and no calculation of differences. The price is locked (hence “locked box”).

The question remains: what happens to the company’s value between the locked box date and the transaction closing date? If something good happens in the meantime—for example, new lucrative contracts are signed—the buyer benefits. If something bad happens—inventory increases or revenues decrease—the seller benefits, because the price has not changed.

That is why the locked box mechanism introduces a rule on so-called leakage—i.e., value leakage. The seller must guarantee that between the locked box date and the closing date, no value is extracted from the company other than in the ordinary course of business.

Examples of such leakage include dividends, management fees, the sale of undervalued assets, or the waiver of receivables. If leakage occurs, the seller must reimburse the buyer, usually with interest.

What are the advantages of the locked box mechanism from the seller’s perspective? Simply put, certainty. The seller signs the agreement, the price is fixed, and shortly thereafter—once the other conditions are met—receives the money.

There are no long months of calculations, no disputes about how the balance sheet was prepared, and no unknown risk. This is a major advantage, especially for financial investors who want to close matters cleanly and as quickly as possible.

The disadvantages from the buyer’s perspective? If the price is based on a balance sheet prepared by the seller, which is common, the buyer assumes a certain level of risk. Even if the buyer conducts thorough due diligence, after signing the agreement the buyer has no control over what is reflected in the audited balance sheet.

If it is later discovered that the balance sheet was materially different, it is too late. The buyer is only entitled to reimbursement for leakage if it proves that leakage occurred, but is not entitled to a price reduction if it turns out that the business is not as healthy as it appeared from the facts.

Completion accounts mechanism

Completion accounts work the other way around. The parties agree on a preliminary price on the transaction closing date (closing), but the actual, final price is determined later, once a special balance sheet as of the closing date (completion balance sheet) is prepared.

The process typically works so that the seller or the buyer (usually the buyer, because it has access to information after closing) prepares a draft completion balance sheet. The other party reviews it and has the right to raise comments and dispute individual items.

If no agreement is reached, it is common to appoint an independent accounting expert (arbitration).

Once the final balance sheet is approved, the purchase price adjustment is calculated. If working capital is higher than expected, the buyer pays the seller a top-up. If it is lower, the seller reimburses the buyer, or the price is reduced from the previous payment.

The advantage is for the buyer—it can truly see what working capital it received. It is therefore not exposed to the risk of taking over a company in a deteriorated condition. There is also an advantage for the seller if the company performed better during the interim period than expected—then the seller receives a top-up.

The disadvantage for the seller is uncertainty. The seller does not know how much money it will receive until the final balance sheet is calculated. This can take months, and during that time the seller is tied up and cannot plan. The seller also loses control—the buyer now runs the company and prepares the balance sheet, and although the seller has the right to review it, the outcome largely depends on how the buyer interprets individual items.

The disadvantage for the buyer is that completion accounts create room for disputes. The parties may not align on how individual items are measured, how GAAP (Generally Accepted Accounting Principles) is interpreted, what is included in inventory and what is not.

Attorneys at ARROWS advokátní kancelář handle dozens of cases where buyers and sellers spend months in arbitration because they cannot agree on whether a particular receivable belongs on the balance sheet or whether it is a doubtful receivable that needs to be written off. In practice, a hybrid approach is often used—locked box for stable, predictable parts of the business and completion accounts for parts with higher volatility.

What counts as working capital: Rules and pitfalls

When the parties opt for completion accounts, or for a locked box with clearly defined working capital, they must agree on what exactly is included in working capital. Below is a list of the most common questions ARROWS attorneys discuss with clients.

Tangible assets, production machinery and real estate

These items do not belong to working capital. Working capital relates to current assets—items that “turn over” in the course of business (inventory is sold, receivables are paid, etc.).

Machinery and real estate are fixed assets, and if any adjustment applies to them, it should be addressed separately, not as part of working capital.

Taxes and tax liabilities

The same rule applies here as for machinery—tax matters (what the company owes to the state) are usually dealt with outside working capital, as a separate transitional item.

The seller should pay all taxes for the period up to the closing date; the buyer then assumes responsibility from the closing date onwards.

Liabilities discovered after the transaction is closed

What happens if, after closing, it is discovered that a liability in fact exists that did not appear on the balance sheet? This typically involves situations where, for example, a company vehicle was not included in the transaction, but there is a leasing liability relating to it.

Or where it is discovered that the company has an old municipal debt that nobody knew about. This is addressed through indemnities (compensation) and representations (statements), not through working capital. ARROWS attorneys see case after case where this is mentioned in an incoherent way in the SPA and then leads to ambiguity.

Most often, the seller and the buyer cannot agree on the extent to which such an old liability should be considered a “part of working capital” and therefore deducted from the price, or whether it is a breach of warranty to which an indemnity applies.

Unpaid bonuses 

The company has a liability—for example, it is required to pay employees a due bonus. Everyone knows that the money will be transferred to the accounts only after the deal is completed (closing). Should such a bonus be included in working capital (as a liability) or not?

If the bonus is real, it should be included as a liability in the normal amount. If the seller claims that the bonuses should have been higher because “that’s how it has always been”, then this is addressed through indemnities, not through working capital.

How the working capital adjustment is calculated: 

To return to real practice, let’s look at how the adjustment is calculated in specific terms. Assume that the parties agreed on the completion accounts mechanism and that working capital is calculated as follows:

  • Working capital = current assets (excluding cash) – current liabilities.
  • Reference (target) working capital = CZK 5 million.

On the closing date, a balance sheet is prepared. This balance sheet typically shows, for example: Inventory CZK 3 million, Receivables CZK 4 million and Cash CZK 2 million (which is excluded). Total current assets therefore amount to CZK 7 million (excluding cash).

On the liabilities side, for example: Payables CZK 1 million, accrued expenses CZK 1 million and short-term debt CZK 1 million. Total current liabilities therefore amount to CZK 3 million.

Actual working capital = 7 – 3 = 4 million.

If the target working capital was 5 million, then the actual working capital is 1 million lower. This means the buyer is receiving less working capital than expected. Therefore, the buyer is entitled to a refund—by reducing the purchase price by 1 million.

The reverse situation: If the actual working capital were 6 million (1 million more), then the buyer will pay the seller an additional 1 million.

All of this looks simple, but ARROWS attorneys are often engaged as a result of the parties failing to agree on what counts as inventory, how receivables are calculated, or what “current liabilities” are. All of this leads to disputes and arbitrations that cost millions in legal fees.

Disputed points in the definition of working capital

Based on dozens of cases handled by ARROWS attorneys, these are the areas where disputes most often arise:

Stocktakes and obsolete inventory

The seller claims that all inventory included in the stocktake is fully usable. The buyer then finds that part of the inventory is older, damaged, or unusable.

The buyer wants to count only a certain portion of inventory as part of working capital, or wants to apply a reduction factor. The seller argues that the stocktake was carried out in the presence of both parties and that it is not their fault if the buyer later discovers that something is not suitable.

Solution: The share purchase agreement should include a rule under which inventory is calculated based on its market value, not its nominal book value. It should also specify that obsolete inventory (older than X months) is included with a certain percentage discount.

Doubtful receivables

The same applies to receivables. The seller claims that all receivables are good and will be paid. The buyer discovers, for example, that a key customer has stopped paying, or that there are receivables from companies that are insolvent.

How many of them should have been included in working capital? Solution: The share purchase agreement should include a clear list of major receivables stating that they are included in full, and set a percentage “reserve” for doubtful receivables.

Seasonal variations

For businesses with a seasonal nature, working capital changes dramatically throughout the year. In summer it may be high (lots of inventory), in winter low.

If closing takes place in winter and the target working capital was based on the summer position, then there will of course be a deficit. But is it the seller’s fault, or just a natural seasonal variation?

Solution: For such businesses, it is common to use the average working capital over the last 12 months, not a specific point in time.

Possible issues

How ARROWS helps (office@arws.cz)

Pre-closing dividend without control. The seller takes millions out of the company shortly before closing, and the price does not change.

ARROWS attorneys ensure that the share purchase agreement contains an explicit definition of which dividends are permitted and which are prohibited. They will prepare an appropriate price adjustment mechanism so that the buyer does not pay for “extracted” funds.

Unclear definition of working capital. The parties are not clear on what is included and what is not, and after closing they blame each other for million-level differences.

ARROWS, a Prague-based law firm, will prepare a precise definition of working capital with an explicit specification of what is included, what reserves are counted, and how seasonal fluctuations are handled.

Dispute over the calculation of the completion balance sheet. The buyer and seller cannot agree on how the balance sheet was calculated or which accounting standard was applied. Monthly arbitration follows.

ARROWS will ensure that the accounting principles (IFRS, local standards) to be applied are clearly defined already in the share purchase agreement. The attorneys will help prepare the arbitration rules.

Mismatch between target and actual working capital due to errors in the definition. The seller thought they would take certain funds, but the calculation showed that they are treated differently.

ARROWS attorneys will verify that all material working capital items are agreed and clearly documented before closing. They will carry out a “dry run” of the calculation.

Tax implications of price adjustments and dividends. Price changes and dividends may have tax consequences that are not addressed in the share purchase agreement.

ARROWS attorneys work with tax specialists to set the price adjustment in a way that minimises the tax risk for both parties.

Alignment with tax obligations

This is where a relatively new element comes in, which is gaining importance in the Czech legal environment. As of 2025, there have been changes to the taxation of sales of interests in business corporations.

Under Act No. 586/1992 Coll., on Income Taxes, income from a sale is exempt from tax if the owner has held the interest for at least 5 years, or 3 years for securities. The condition is that these interests were not part of business assets.

In 2025, a limit of CZK 40 million was introduced for individuals—income from the sale of interests and securities that are not part of business assets exceeding this threshold is taxed, even if the time test is met. This limit was abolished for income from the sale of interests and securities as of 1 January 2026.

How does this relate to dividends and working capital? Very simply—the timing of dividend distributions and price adjustments affects when the income is “realised” and how tax applies to it.

If the seller declares a dividend in January and it is paid in February, the tax is calculated from February. If the purchase price includes a working capital adjustment that is calculated only in March, then that adjustment is also taxed in March.

ARROWS attorneys are aware of these dates and details. One of their typical tasks is precisely this tax optimisation of the transaction structure so that it works as well as possible for both parties.

FAQ: Working capital and pre-closing dividend

1. As a seller, can I take a dividend shortly before closing?

Legally yes, but in practice it depends on what the share purchase agreement says. If the agreement contains a “dividend lock” (a prohibition on paying dividends), then no. If it contains a “permitted leakage” clause, then you can, but only to a certain extent. If nothing is stated, formally you can, but you risk the buyer having the right to a refund. ARROWS attorneys in Prague will guide you through negotiations with the buyer and help structure the transaction so that you receive all your money without later misunderstandings.

2. What happens if the parties cannot agree on how working capital is calculated?

Typically, an independent accounting expert (an arbitrator) is appointed to assess both positions. In Czech practice, the work of the appointed arbitrator is referred to as an “expert determination” (odborný posudek)—a formal process described in the share purchase agreement under Act No. 89/2012 Coll., the Civil Code. Resolution through expert determination or arbitration can take months and cost hundreds of thousands to millions of Czech crowns. This is avoided by agreeing all details already in the share purchase agreement.

3. How do I optimize taxes if I am selling my equity interest and still want to take a dividend?

This is a complex question that depends significantly on how long you have held the interest and on your personal circumstances (individual vs. legal entity, tax residency, etc.). It is also crucial how the transaction itself is structured.

The ARROWS legal team works on this together with tax specialists. Although the time test remains in place, the newly introduced exemption cap must also be taken into account. That is why proper timing and structuring of the transaction is even more important than before. Contact office@arws.cz for a specific consultation.

4. Is a locked box or completion accounts better?

It depends on your situation. A locked box gives you certainty as the seller, but you lose any opportunity for additional upside if the company improves in the meantime. Completion accounts give you a chance for a top-up payment, but they create uncertainty and the risk of a dispute. A common compromise is a hybrid – locked box for stable items, completion accounts for items that change quickly. The ARROWS legal team can advise you on which option is best for you.

5. What is the typical completion accounts timeline?

Typically, closing takes place and the buyer (or the agreed accountant) prepares a draft completion balance sheet within 30–60 days. The seller reviews it and has 15–30 days to provide comments. If they do not agree, an arbitrator is appointed, who has 30 days to decide. All of this should be set out in the share purchase agreement. If it is not, it can take months and you lose time.

6. What if, after closing, it is discovered that working capital was already misstated at closing?

This is a matter for indemnification. If the seller provided you with false information or knowingly concealed something, you may be entitled to a refund under the warranty clauses in the share purchase agreement. ARROWS attorneys in Prague will lead the negotiations and, if necessary, court proceedings. That is why it is important that the processes for how data is obtained and who is responsible for which information are clearly defined. Contact office@arws.cz regarding your specific situation.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue as of 2026. Although we strive for maximum accuracy, laws and their interpretation evolve over time. We are ARROWS Law Firm, a member of the Czech Bar Association (our supervisory authority), and for the maximum security of our clients, we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of the regulations and their application to your specific situation, it is necessary to contact ARROWS Law Firm directly (office@arws.cz). We are not liable for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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