This article helps buyers and their advisers understand why working capital matters in business and share sale transactions.
As lawyers, we regularly see issues arise in this area. Working capital is primarily an accounting concept. However, understanding the basics and asking the right questions early can prevent costly post-completion surprises.
What is Working Capital and Why Does It Matter?
Working capital equals current assets (such as receivables and inventory) minus current liabilities (such as payables and accrued expenses). It reflects the liquidity available to fund day-to-day operations.
If the seller leaves insufficient working capital in the business at completion, the buyer may need to inject funds immediately. This can disrupt operations and reduce the true value of the transaction.
When Should Working Capital Remain in the Business?
In share sales, where the buyer is purchasing the whole entity and its liabilities, it is generally expected that a “normal” level of working capital will be left in the business. In business or asset sales, working capital may not automatically transfer unless specifically negotiated.
Practical Insight: In our experience, sellers in smaller deals (under $2 million) are rarely expecting to leave working capital in the business. Even many mid-market sellers are surprised when the buyer assumes it will be left in.
If your offer assumes a level of working capital will be left behind, make this clear early in the negotiation.
How Should Buyers Approach Working Capital?
The best approach is to set a realistic and well-supported target working capital figure that reflects what the business actually needs to operate. Buyers should investigate:
- Seasonal patterns in cash flow and trading
- Typical payment terms with customers and suppliers
- Whether any large bills are due shortly after completion
This process will inform whether to negotiate a working capital adjustment clause, where the final price is adjusted if actual working capital at completion is above or below the agreed target.
Final Thoughts
Working capital can be a deal-saver or a deal-breaker. Buyers who understand its implications, ask the right questions early, and use expert tools to support their negotiation are far better placed to secure a stable, cashflow-sound business.
Want More Help? Get Our Working Capital Checklist
We now have available for you a detailed checklist for buyers that gives some ideas about the following areas:
- What to include or exclude from the working capital calculation
- How to review historical figures
- How to identify red flags in the seller’s approach
- Tips for negotiating a fair adjustment mechanism
Want a copy of this checklist?
If you’re already a client – just contact your legal team at Aspect Legal and they’ll send it through.
Not working with us yet? No problem. Get in touch to book a free 15-minute call with one of our senior lawyers, and we’ll provide the checklist as part of your session..
Disclaimer: This guide is provided for general informational purposes only and does not constitute legal, accounting, financial, or other professional advice. It is not a substitute for tailored advice. We strongly recommend engaging your accountant and legal advisor to assist with working capital analysis and other aspects of deal preparation.
