A business’s value is not determined by profit alone. In acquisitions, working capital plays a critical role in ensuring a company can continue operating smoothly after completion. And that means it can materially affect the final purchase price.
Business leaders looking for an exit should seek professional help to understand and assess working capital to preparing for the due diligence process, avoid valuation disputes, and achieve a cleaner transaction outcome.
Working capital can directly affect how smoothly a business can operate after a transaction closes and how much the business is truly worth. It can significantly change the effective value of a deal.
A company may appear highly profitable on paper but still require large amounts of cash to sustain operations. This is why buyers insist that a ‘normal’ level of working capital remains in the business at closing.
In acquisition discussions, buyers usually focus on ‘operating working capital’, which excludes cash and debt and concentrates on the operational components of the business. These will typically include accounts receivable (money owed by customers), inventory, minus accounts payable (money owed to suppliers).
Yet normal levels of working capital are equally important.
When a buyer acquires a company, they expect it to continue operating normally immediately after closing. That means the business should be delivered with sufficient receivables, inventory, and supplier balances to support ongoing operations.
Problems arise when sellers attempt to extract cash before the sale completes. A seller might:
These actions may temporarily increase cash before closing, they can leave the business underfunded afterward. The buyer would then need to inject additional cash simply to restore normal operations.
Without sufficient working capital:
To prevent this, acquisition agreements typically include a working capital target or normalised working capital requirement. This target is usually based on the company’s historical average working capital over a defined period.
The seller should leave behind enough working capital for the business to operate in its ordinary course after the transaction closes.
Most acquisitions include a mechanism that adjusts the final purchase price depending on the actual working capital delivered at closing:
The adjustment ensures that the buyer receives a company that is not underfunded and capable of operating under normal conditions immediately after the transaction.
Working capital also influences how buyers evaluate the quality of a business.
A company that requires large amounts of working capital to generate revenue is often viewed as less attractive because growth consumes cash.
By contrast, businesses with efficient working capital management are generally more valuable because they:
Buyers often pay premium valuations for businesses that convert profits into cash efficiently.
During the due diligence stage, Kreston Reeves experienced Corporate Finance team carefully reviews:
With buyers particularly cautious about signs that the seller has artificially improved cash balances before closing, the due diligence process helps both parties understand what level of working capital is truly necessary to operate the business sustainably.
A profitable business does not always equal a transaction-ready business. Buyers want confidence that a company can continue trading smoothly from day one, without unexpected cash pressures or funding gaps.
Understanding working capital early, and preparing for the scrutiny that comes with due diligence, can help avoid last-minute disputes, protect value and improve deal outcomes.
Kreston Reeves works closely with business owners to help them prepare for sale, strengthen their financial position and approach negotiations with confidence. If you would like bespoke assistance, please do get in touch.
What is working capital in a business sale?Working capital in a business sale refers to the operational funds needed for day-to-day trading, typically including accounts receivable, inventory and accounts payable, while excluding cash and debt. Buyers focus on operating working capital because they want the business to continue functioning normally after completion without requiring immediate additional funding from the new owner.
Why does working capital matter when selling a business?Working capital matters because it can significantly affect both the final purchase price and how smoothly a business operates after the sale completes. A company may appear profitable but still need substantial cash to support operations. Buyers therefore expect a “normal” level of working capital to remain in the business at completion to avoid operational disruption or unexpected funding requirements.
How can working capital affect the final purchase price in an acquisition?Working capital often directly changes the final purchase price through adjustment mechanisms built into acquisition agreements. If the working capital delivered at closing is below the agreed target, the purchase price is usually reduced. If it exceeds the target, the seller may receive additional payment. This helps ensure the business is adequately funded for normal trading after completion.
What happens if a seller removes too much cash before a business sale completes?Removing too much cash or reducing working capital before completion can leave the business underfunded immediately after the sale. Examples include accelerating customer collections, delaying supplier payments or aggressively reducing inventory. This can lead to supplier pressure, stock shortages, delayed payroll and the need for additional financing once the buyer takes ownership.
Why do buyers want a “normal” level of working capital at completion?Buyers require a normal level of working capital because they expect the business to continue operating smoothly from day one after the transaction closes. The business should retain sufficient receivables, inventory and supplier balances to maintain ordinary operations without requiring the buyer to inject extra cash simply to stabilise the company after acquisition.
How do buyers assess working capital during due diligence?During due diligence, buyers review historical working capital trends, seasonal fluctuations, customer payment behaviour, inventory turnover and supplier payment terms. They also look for unusual pre-sale changes that may artificially improve cash balances before completion. Businesses preparing for sale can benefit from specialist sell-side advisory services to help avoid disputes and improve transaction outcomes.
Can strong working capital management increase business value?Efficient working capital management can improve business value because buyers typically favour businesses that convert profits into cash effectively. Companies with lower working capital requirements often generate stronger free cash flow, need less external financing and scale more efficiently. These characteristics can support stronger valuations during negotiations and acquisition discussions.
What working capital issues can delay or complicate a business sale?Working capital disputes can arise when buyers believe sellers have manipulated cash flow before completion or when there is disagreement over what constitutes a normal working capital level. Without clear targets based on historical averages, negotiations can become difficult. Businesses considering a sale may benefit from professional transactional valuation services to support accurate financial preparation and negotiations.
How can business owners prepare for working capital scrutiny before a sale?Business owners can prepare by reviewing historical working capital performance early, understanding seasonal trends and ensuring financial records clearly support operational funding requirements. Preparing properly for due diligence can help reduce valuation disputes and strengthen buyer confidence. Specialist advisers can also help businesses improve financial positioning before entering sale negotiations.
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