How working capital affects business value (and how to stay ahead of it)
When it comes to selling a business, most owners focus on revenue, profit margins, or growth trends. But there’s a quiet assassin lurking in the numbers; working capital. Often overlooked, this figure can derail negotiations, delay settlements, and even kill deals. Here’s what you need to know.
What is Working Capital?
Working capital is the cash, stock, and short-term assets your business uses to operate every day, minus the short-term liabilities. Think of it as the fuel in your business engine. It covers things like payroll, supplier invoices, and running expenses.
In technical terms:
Working Capital = Current Assets – Current Liabilities
That means:
Assets: Cash in the bank, accounts receivable (money owed to you), and inventory.
Liabilities: Accounts payable (what you owe), short-term loans, accrued expenses.
Why Buyers Care
When a buyer evaluates your business, they aren’t just buying your systems, brand, and revenue stream. They’re also buying the ability to keep the business running without immediate extra investment.
If your working capital is too low, the buyer may worry about having to inject cash straight away. Too high? They might argue they’re paying for more than they need.
How It Affects Your Business Value
Here’s the thing, working capital can directly impact the final price paid.
Lower working capital = buyers might discount the price or ask for delayed payment terms.
Higher working capital = buyers might negotiate to reduce the payout or shift more risk onto the seller.
This can often happen with deals that have earnouts or delayed payment structures. If working capital isn’t clearly accounted for, it becomes a point of tension.
What Happens During Due Diligence
During due diligence, buyers dig into your financials. If your working capital trends raise red flags, sudden drops, bloated stock levels, or inconsistent payables, expect questions. And delays.
We’ve seen deals stall for months or even fall through completely due to unresolved working capital disputes.
How can you Protect Your Sale?
Know your baseline: Calculate the business’s working capital needs before going to market.
Smooth out anomalies: Fix any erratic stock levels or unusual liabilities.
Get expert advice: A business broker or valuation expert can help you present the numbers in the best light.
Working capital may not be the flashiest figure on your balance sheet, but it’s one of the most important in a sale. Treat it with the attention it deserves and you’ll be in a much stronger position when it counts.