Key points
- Most small deals are cash free and debt free, so you pay off business debt at closing.
- Lenders may require working capital after closing.
- Cash the buyer must add raises the effective price.
- Define what working capital means before you sign.
What working capital means
Working capital is the cash, receivables and inventory a business uses to pay bills, minus what it owes in the short run. A company needs enough to cover payroll and suppliers until customers pay.
Cash free and debt free
Most small deals start cash free and debt free. You keep the cash and pay off the business debt from the sale proceeds. The buyer gets the assets and goodwill.
Sellers usually keep cash and receivables for work already done, and the agreement says exactly what transfers.
Why the buyer asks
A buyer who takes over an empty account must fund payroll right away. Lenders may require a cushion, and if the buyer funds it, the effective price rises.
Some deals leave a target amount of working capital in the company. Agree on the number and how it is measured, or a dispute can follow closing.
Seasonal businesses
Companies with seasons carry less cash in slow months. A monthly forecast built early shows the cash lows and helps both sides plan.
Inventory
Heavy inventory relative to earnings can concern lenders. Buyers may ask for a physical count before closing, so keep the records tidy.
Who decides the number
The target is negotiated, not set by a rule. A buyer will propose a high level and a seller will argue for a lower one, so bring your own forecast.
Agree how the amount is measured on the closing date and how a shortfall or surplus is settled afterward.
Prepare your numbers
- A monthly cash and receivables forecast
- An aging report for customers who owe you
- A clean inventory list
- A written proposal for what stays and what leaves
The seller's net depends on all of this. Request a value estimate and read how earnings adjustments set the starting price.