Glossary

Working capital

Current assets minus current liabilities. The cash a business needs to fund daily operations — and a real line item in the buyer's total cash needed at closing.

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 working capital means the business has enough short-term assets to cover its short-term liabilities. Negative working capital means it doesn't — the business is funding operations from short-term debt or delayed payments to suppliers.

Why it matters in an acquisition

Many buyers focus on the purchase price and forget that they also need to fund the business's working capital at close:

• 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

Many purchase agreements include a "working capital target" — a normalized level of working capital the seller must deliver at close. If the actual working capital at close is below the target, the purchase price is adjusted down; if above, it's adjusted up. 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 the seasonal low point at close, plus a 10–20% cushion.

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.

Where to go next

• Due diligence checklist — including working capital analysis
• Affordability calculator — total cash needed at close
• Quality of Earnings definition
• Goodwill definition