Working capital: what a buyer expects you to leave in the business

From Matt Behrens, who has bought businesses for 15 years · 2026-10-05

Many owners learn about working capital at the worst possible moment: after they have agreed on a price. The buyer says the business needs a "normal level of working capital" at closing, and the conversation stalls. The owner hears that the buyer wants to take back part of the price. The buyer is trying to make sure the business they just paid for can keep running on day one. Understanding the idea early takes most of the heat out of it.

Matt's experience: I once tried to buy a small manufacturing business with strong seasonality. After the peak season, inventory was low and the cash from those high-season sales was sitting in the bank. The owner planned to pocket that cash and hand over a business with little inventory. I had to explain that I was buying a stream of profits, not a snapshot of the balance sheet. With no receivables to collect and an empty warehouse, I would have had to invest a couple of million dollars to rebuild inventory before the business could reach its normal level of sales. In the owner's mind, though, the cash on the balance sheet had been added to the sale price, and that was the take-home number. When the owner realized what the buyer would need, the deal stalled.

What working capital is, in plain English

Working capital is the money tied up in running the business from day to day. In simple terms it is what the business owns in the short term (inventory, money customers owe you, and some cash) minus what it owes in the short term (bills to suppliers, payroll not yet paid, taxes due). A business needs a certain amount of it just to buy product, make payroll and wait to be paid. Without that amount, the business stalls, however good its profit looks.

Three things sellers often expect

1. To be paid for inventory on top of the price

Many sellers assume that if they have $500,000 of inventory on the shelf, a buyer will pay the purchase price and then $500,000 more. In most deals that is not how it works. The buyer sees inventory at a normal level as part of what it takes to run the business, and the price already assumes it comes with the business. You may be paid for inventory above the normal level, and slow or old stock is usually discounted or left out. How it is handled depends on the agreement.

2. To collect the money customers owe after closing

It is common for sellers to plan on collecting all outstanding receivables after the sale. In many deals, the receivables stay with the business as part of the normal working capital the buyer expects. In others, they are settled in a different way. Either way, a buyer will not want to take over a business with empty receivables and a full set of bills to pay. This varies by how the deal is structured, so plan for the conversation instead of assuming.

3. To take all of the cash out of the business

In many small deals the seller keeps the cash and pays off the debt, which is often called selling the business "cash-free and debt-free." That does not mean the business can be left with an empty bank account and a payroll due on Friday. Buyers expect the business to be able to operate right after closing. If you sweep the accounts to zero the day before, expect a conversation about what has to be put back.

Why a buyer insists on a normal level

A buyer is paying for a business that earns the profit you showed. That profit was earned with a certain amount of inventory, receivables and cash behind it. If the buyer has to put in their own money on day one just to restore that level, they have effectively paid more than the price. So they ask that a normal level stays in the business.

How the target is set

The target, sometimes called the "peg," is usually based on the average working capital the business has needed over the last 12 months or so, not on a single good or bad day. Seasonal businesses are looked at especially closely, because a snapshot in the slow season can look very different from the busy one.

How it is settled at closing

Working capital is measured near closing, compared with the target, and the price is adjusted up or down. If you deliver more than the target, you may be paid for the extra. If you deliver less, the price drops by the shortfall. Lenders and buyers also check this again after closing, which is why clean, consistent monthly records matter.

How it is financed

Most buyers borrow to buy a business, and lenders care a great deal about working capital. They want to see that the business has enough inventory and receivables to operate, and often lend against them with a line of credit. Lenders may audit inventory and receivables as part of the process. A business whose inventory is counted regularly and whose receivables are collected on time moves through this much faster than one that has to scramble to explain its numbers.

What a buyer and a lender will ask

• Monthly balance sheets for the last two to three years, so they can see the real pattern.
• A current inventory count, with age and how fast each item moves.
• An aging report for receivables, showing who owes you and for how long.
• A list of what you owe suppliers and when it is due.
• How seasonal the business is, and when it needs the most cash.
• Whether the numbers on your balance sheet tie to your tax returns and bank statements.

What to fix 12 to 24 months out

1. Produce a monthly balance sheet along with your profit and loss statement, and review it each month.
2. Count inventory on a schedule, and clear out stock that does not move.
3. Keep receivables current. Follow up on late accounts, and write off what you know you will not collect.
4. Pay suppliers on your normal terms, and avoid sudden changes before a sale. Stretching bills to look like you have more cash backfires in diligence.
5. Learn your normal level. Work out the average working capital the business actually needs across a full year, including its busy season.
6. Talk to your accountant about how working capital would be defined in a sale of your business, before you hear about it from a buyer.

Common questions

Does a normal level of working capital mean I get nothing for my inventory?

No, but you should not expect to be paid for it dollar for dollar on top of the price. A normal level is generally treated as part of the business. Inventory above that level may be paid for, and slow or old stock is usually discounted. Your agreement decides.

Can I take my cash out before closing?

In many deals, yes, the seller keeps the cash and pays off the debt. But the business still has to be able to operate right after closing. Agree on this with the buyer in writing, and do not drain the accounts without talking to them first.

What if my business is seasonal?

Tell the buyer early. The target should reflect the average over a full year, not one month. A sale that closes in the slow season can look very different from one that closes in the busy season, so timing and definitions matter.

This guide is educational planning information, not legal, tax or investment advice.