In short
- Buyers expect the business to keep enough cash and stock to run on day one.
- Inventory is usually counted near closing and priced at cost.
- Cash free and debt free is common, with working capital handled separately.
- Agree on how it is measured before you sign, not after.
What Working Capital Means
Working capital is the money and stock a business needs to operate day to day. It includes cash for payroll, inventory on the shelves and what customers owe, less what the company owes suppliers.
Buyers want a normal level of it left in place, since an empty business cannot pay staff or restock.
Cash Free, Debt Free
Many small deals are priced cash free and debt free. The seller keeps the cash and pays off loans. The buyer then funds working capital, which raises the real cost of the deal.
Some lenders want seller cash left in as working capital. If the buyer funds it instead, the effective price goes up.
Counting Inventory
Stores, restaurants and shops usually count inventory near closing, sometimes with both sides present. Buyers often pay for stock at cost, and slow moving or damaged items may be left out.
Heavy inventory compared with earnings can also worry lenders. Right size it before you list.
Setting the Target
Buyers and sellers often agree on a target level based on a monthly average over the past year. If the level at closing is lower, the price drops, and if higher, it rises.
Seasonal businesses have to be careful here. A target set in a slow month may favor the buyer. Ask your broker to model the year before you agree.
Receivables and Payables
In many asset deals the seller keeps receivables for work already done, and pays its own payables. In others the buyer takes both. This choice should be settled in the letter of intent.
Planning Ahead
Build a monthly cash forecast early to see seasonal lows. For restaurants and stores, also read alcohol license changes, since alcohol stock is counted and licensed separately, and request your valuation when you are ready.