When small business owners think about selling their company, most of the focus tends to be on one thing: the purchase price.
But many sellers are surprised to learn that the amount they actually receive at closing can be heavily influenced by something called working capital.
Understanding how working capital works before you go to market can help you avoid misunderstandings, negotiate more effectively, and prevent unpleasant surprises at closing.
What Is Working Capital?
In simple terms, working capital is the money a business needs to fund its day-to-day operations.
It's typically calculated as:
Current Assets (excluding cash) – Current Liabilities
This often includes items such as:
- Accounts receivable (money customers owe you)
- Inventory
- Accounts payable (bills you owe suppliers)
One of the biggest misconceptions among small business owners is thinking that all the money tied up in the business belongs to them personally.
A better way to think about working capital is that it's the oil in a car engine. The oil doesn't make the car more valuable by itself, but without it, the car won't run properly. In the same way, working capital is the fuel that keeps the business operating. Buyers expect the business to have enough working capital to continue running normally after they take ownership.
What Working Capital Means in a Sale
Most business sales include a working capital target. This target represents the normal amount of working capital required to operate the business.
At closing, the buyer will compare the actual working capital in the business to the agreed-upon target.
- If working capital is above the target, the seller may receive additional proceeds.
- If working capital is below the target, the purchase price is often reduced dollar-for-dollar.
This is why two deals with the same purchase price can result in very different amounts of cash to the seller.
Common Misunderstandings at Closing
Many disputes occur because sellers assume:
- All cash generated before closing belongs to them.
- Inventory is included separately from the purchase price.
- Accounts receivable automatically belong to the seller.
- Working capital adjustments are minor and won't affect proceeds.
In reality, working capital adjustments can change the seller's final proceeds by tens of thousands—or even hundreds of thousands—of dollars.
How to Avoid Surprises
The best way to avoid working capital issues is to address them early.
Before going to market:
- Understand your historical working capital levels.
- Know how inventory, accounts receivable, and accounts payable will be treated.
- Review the proposed working capital target carefully.
- Ask your Transworld broker or your CPA to model potential adjustments before signing a deal.
A business sale is about much more than the headline purchase price. Understanding working capital can help ensure that the amount you expect to receive is much closer to the amount that actually ends up in your bank account.
Final Thoughts
Working capital is one of the most misunderstood aspects of selling a business. While most owners focus on the headline purchase price, the treatment of inventory, accounts receivable, accounts payable, and working capital can have a significant impact on what they ultimately receive at closing.
The good news is that with a little planning and a clear understanding of how buyers view working capital, you can avoid surprises and negotiate from a position of strength.
If you'd like to better understand how working capital could affect the sale of your business—or if you're simply curious about what your business might be worth—reach out to Patrick Bombardiere, a Transworld Business Broker, at patrick@tworld.com for a confidential, no-obligation conversation. Whether you're planning to sell soon or just exploring your options, a quick discussion can help you better understand the value of your business and the factors that can impact a successful transaction.