Working capital

What it is

Working capital = Current assets (cash, accounts receivable, inventory, prepaid expenses) − Current liabilities (accounts payable, accrued expenses, short-term debt, deferred revenue).

Positive means the business can cover its short-term liabilities from its short-term assets. Negative means it cannot, and is running on short-term debt or on paying suppliers late. Neither is automatically good or bad — some business models are built to run negative.

Why it matters in an acquisition

Buyers plan for the price and forget the rest. You also have to fund the working capital on day one:

• If the target's working capital is low or negative, the buyer may need to inject additional cash at close to fund operations until revenue catches up.
• If the target carries significant accounts receivable, the buyer typically purchases those receivables at a discount (or inherits them at close) — affecting the total cash needed.
• If the target carries significant inventory, the buyer typically purchases that inventory at cost (separate from the going-concern value) — a real cash outlay at close.
• If the target has supplier payment terms (net 30, net 60), the buyer inherits those terms — but a change of ownership may reset them, requiring the buyer to rebuild supplier credit.

Working capital target

Most purchase agreements set a working capital target: the normal level the seller has to deliver at closing. Come in below the target and the price drops. Come in above it and the price rises. This prevents the seller from running down inventory or delaying supplier payments to make the business look better at close.

How to estimate working capital needs

1. Pull the trailing 12 months of monthly balance sheets.
2. Calculate working capital (current assets − current liabilities) for each month.
3. Identify the seasonal low point — the month when working capital is at its lowest.
4. Plan to fund the business to at least its seasonal low point at close, plus a cushion. There is no standard cushion percentage worth quoting — size it from the target’s own monthly swing and the length of its cash conversion cycle, which is what the working capital calculator does.

New York-specific notes

• NYS sales tax collected but not yet remitted is a current liability — verify the seller has been remitting on time. The bulk-sale notice process protects against unpaid sales tax liability.
• NYC taxes accrued but not yet paid (Business Corporation Tax, UBT, CRT) are current liabilities — verify the seller's accruals.
• NYS workers' comp, statutory disability, and PFL premiums accrued but not yet paid are current liabilities.
• For seasonal NYS businesses (tourism, landscaping, car washes), the working capital low point can be significant — plan accordingly.

The full guide: Working capital in a business acquisition.