Cephalosporin acylase is a member of the N-terminal hydrolase family, which is activated from an inactive precursor by autoproteolytic processing to generate a new N-terminal nucleophile Ser or Thr. The gene structure of the precursor cephalosporin acylases generally consists of a signal peptide that is followed by an α-subunit, a spacer sequence, and a β-subunit. The cephalosporin acylase precursor is post-translationally modified into an active heterodimeric enzyme with α- and β-subunits, first by intramolecular cleavage and, second, by intermolecular cleavage. Intramolecular autocatalytic proteolysis is initiated by nucleophilic attack of the residue Ser-1β onto the adjacent scissile carbonyl carbon. This study determined the precursor structure after disabling the intramolecular cleavage. This study also provides experimental evidence showing that a conserved water molecule plays an important role in assisting the polarization of the OG atom of Ser-1β to generate a strong nucleophile and to direct the OG atom of the Ser-1β to a target carbonyl carbon. Intramolecular proteolysis is disabled as a result of a mutation of the residues causing conformational distortion to the active site. This is because distortion affects the existence of the catalytically crucial water at the proper position. This study provides the first evidence showing that a bound water molecule plays a critical role in initiating intramolecular cleavage in the post-translational modification of the precursor enzyme.