Working Capital in Acquisitions: A Buyer's Guide

Got a call last month from a buyer who closed on a $2.1M services company. Good business. $520K EBITDA. Clean deal. SBA loan in place.

"I thought I was buying a profitable business," he said. "So why is my bank account empty?"

He wasn't wrong about the profitability. The P&L looked fine. But he was six weeks in and scrambling to make payroll. The business was making money on paper and bleeding cash in real life.

The problem wasn't the business. It was working capital.

What working capital is

Working capital is the cash trapped in daily operations. It's the gap between when you pay for things and when you get paid.

You invoice a customer on March 1. They pay April 1. That's 30 days where the revenue is real but the cash doesn't exist in your account.

You order materials and pay the vendor on delivery. You won't see revenue from those materials for weeks.

You stock inventory that sits on a shelf for 60 days. That's cash in a warehouse, not cash in the bank.

Net working capital = current assets (AR + inventory + prepaids) minus current liabilities (AP + accrued expenses).

The higher the number, the more cash is locked up at any given time.

The working capital peg

Every well-structured purchase agreement includes a working capital peg. It's the agreed-upon level of net working capital the seller delivers at closing.

Here's how it works.

During diligence, the QoE provider calculates the business's normalized working capital. That's a trailing average, adjusted for seasonality and one-time items.

That number becomes the peg.

At closing, actual working capital is measured. Above the peg? Buyer pays the seller the difference. Below the peg? Seller owes the buyer.

The math: normalized working capital is $300,000. At closing, actual is $250,000. The seller owes you $50,000. Either as a purchase price reduction or a post-closing true-up.

Get the peg wrong and you're overpaying for the business or starting Day 1 with less cash than operations require.

Why profitable businesses run out of cash

Three traps. I see all three on a regular basis.

AR timing

Customers pay on 30-day terms. Your first month of ownership generates zero cash inflow. You're paying employees, rent, and vendors from Day 1. First customer payment hits on Day 31.

Business doing $3M in annual revenue? That's $250,000 you need to float before a single dollar comes in the door.

Growth eats cash

This one surprises people. Growing a business COSTS working capital.

Revenue goes up 15%. AR goes up 15%. Inventory goes up 15%. Payroll goes up. All of it happens before the incremental revenue converts to cash.

Growth is good. Growth without a liquidity plan is how you end up calling your lender for an emergency line of credit in Month 4.

The peg was wrong

If the peg was set too low, or if nobody negotiated one at all, you're starting with less cash than the business needs.

The seller pulled cash out before closing. You're the one who has to replace it.

This is one of the most common post-closing disputes in small business acquisitions. And it's preventable with a proper QoE.

What your QoE provider should tell you

Most QoE reports include a working capital analysis. Not all of them explain what the numbers MEAN for your life after closing.

A good QoE answers four questions:

What is the normalized working capital? That's the basis for the peg negotiation.

What is the cash conversion cycle? How many days does it take for a dollar of revenue to become a dollar of cash?

Is the seller managing working capital differently pre-close? Sellers sometimes collect aggressively or delay vendor payments before closing to inflate cash. The QoE should catch this.

At Bedrock, we don't just hand you a number. We explain what the historical WC pattern means for your cash position at close, and flag where the risks are. If AR timing or a thin peg looks like it could create a problem, we'll tell you. What you do with that information, including whether to negotiate harder or line up additional capital, is the conversation to have with your lender and attorney before you sign.

The bottom line

Nobody gets excited about accounts receivable aging schedules. But this is where deals go wrong. Not because the business is bad. Because the buyer wasn't prepared for the cash cycle.

Before you close:

Negotiate the peg. Don't accept a purchase agreement without a working capital mechanism. The QoE gives you the data to set it right.

Plan your liquidity. If the WC analysis shows a gap, talk to your lender about a line of credit before closing. Not after.

Get a QoE. A Quality of Earnings uses the seller's actual books. That's the difference between a guess and a plan.

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*Bedrock delivers Quality of Earnings reports for business buyers, search funds, and SBA borrowers. Every engagement includes a working capital analysis and peg recommendation. Book a free consultation and we'll walk through your deal.*