Most business owners are surprised to learn how working capital is treated in the sale of a business. That’s usually because what working capital means in the world of mergers and acquisitions is different from what it means in accounting.
In accounting terms, or if you ask your CPA, working capital is defined as current assets minus current liabilities. But in M&A, the definition shifts. Buyers often use their own version, and it can vary from deal to deal. Still, it generally boils down to:
Accounts Receivable – Accounts Payable + Inventory
Understanding this distinction is a vital step in preparing to sell your business.
What Happens to Working Capital in a Deal
In smaller transactions typically under $750,000, working capital is often excluded from the deal altogether. But for deals above that threshold, working capital is almost always included in the purchase price.
This comes as a shock to many sellers. They assume the receivables they’ve earned and the inventory they’ve paid for will stay with them, or at least be separate from the sale. In reality, those assets go with the business. They are baked into the sale price. (For reference: sellers almost always keep the cash)
Yes, that can be a tough pill to swallow. But understanding this in advance is crucial.
Here’s why: From a buyer’s perspective, working capital is part of what makes the business function. It’s not just trucks, equipment, and computers that keep things running. Working capital allows the buyer to hit the ground running. It gives them the ability to take deposits, meet payroll, and keep operations moving in those critical first 30 days after closing. No serious buyer wants to start from zero. And most simply won’t do the deal without a reasonable amount of working capital included.
How Buyers Take Advantage
This is also where buyers try to manipulate the deal.
A buyer may tell you they’re paying you a set amount for your business only for you to find out at closing that the amount you're actually receiving is quite a bit less. Why? Because of how they calculated and deducted working capital.
In most offers, you’ll see language like “a normalized level of working capital must be included in the sale.” Sounds harmless. But what does “normalized” mean? The truth is, it can mean anything the buyer wants it to mean. And they often won’t define it until 2–3 weeks before closing once you're fatigued and just want the deal to be done.
That’s when they move the goalposts.
You’ve spent months negotiating. You’ve told your team. You’ve made mental and emotional plans for post-sale life. At that point, most sellers cave. And the buyer walks away with exactly what they wanted.
What We Do About It
This is why it’s so important to understand working capital well in advance of going to market. It’s not just a closing detail—it’s a central part of the deal structure. And if you plan properly, you can use it to your advantage.
At our firm, we address working capital head-on in our ValuePath framework. We help sellers lower the working capital needs of their business before a sale, which ultimately puts more money in your pocket at closing.
Here's a few key areas you can be looking at:
- Inventory levels: Are you carrying more than you really need?
- Customer terms: Are you too generous, letting receivables stretch out unnecessarily?
- Vendor terms: Have you negotiated the best possible payables timeline?
Small changes here, implemented 2–3 years ahead of a sale, can easily add hundreds of thousands of dollars to your net proceeds—without ever having to grow revenue or improve margins. This is strategic, not cosmetic. It’s about getting lean where it counts.
Conclusion
Working capital isn’t just a technicality, it’s a major financial lever in any business sale. The earlier you understand how it works, the better positioned you’ll be when it comes time to sell. Learn the process ahead of time, and don’t let last-minute surprises dictate the terms of your exit.
