Working capital: the hidden factor in business sales

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.

Understanding working capital in business acquisitions

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.

What is working capital?

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.

Why buyers require ‘normal’ working capital

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: 

• Accelerate collections from customers 
• Delay payments to suppliers 
• Reduce inventory levels aggressively

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: 

• employees may not be paid on time,  
• inventory may run short,  
• suppliers may demand payment,  
• operations may slow down,  
• additional financing may become necessary. 

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.

How working capital impacts purchase price

Most acquisitions include a mechanism that adjusts the final purchase price depending on the actual working capital delivered at closing: 

• If working capital is below the agreed target, the purchase price decreases.  
• If working capital is above target, the seller may receive additional payment.

The adjustment ensures that the buyer receives a company that is not underfunded and capable of operating under normal conditions immediately after the transaction.

Why working capital affects business value

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: 

• generate stronger free cash flow,  
• require less external financing,  
• scale more efficiently,  
• produce better returns on invested capital.

Buyers often pay premium valuations for businesses that convert profits into cash efficiently.

How Kreston Reeves helps buyers and sellers

During the due diligence stage, Kreston Reeves experienced Corporate Finance team carefully reviews: 

• historical working capital trends,  
• seasonal fluctuations,  
• customer payment behaviour,  
• inventory turnover,  
• supplier payment terms,  
• unusual pre-sale changes.

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.

Conclusion

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.