Working capital — the current assets minus current liabilities used to fund day-to-day business operations — is one of the most frequently negotiated and misunderstood elements of business sale transactions. Most small business sales involve working capital provisions that affect the net proceeds the seller receives and the operating capital the buyer has available at closing.
What Is Typically Included
Working capital in most service businesses includes: accounts receivable (money customers owe the business), cash in operating accounts, prepaid expenses, and inventory at cost (for product businesses). Current liabilities include accounts payable (money the business owes vendors), accrued expenses (wages, taxes, rent owed but not yet paid), and deferred revenue (services paid for but not yet delivered). Net working capital is current assets minus current liabilities.
Why It Matters in a Sale
The question of who keeps the working capital at closing — and how much there should be — is a standard negotiation point. In many small business sales, the seller retains accounts receivable and pays off accounts payable, delivering the business with a clean balance sheet. In others, a working capital target is agreed upon, and the purchase price is adjusted up or down based on whether actual working capital at closing is above or below the target.
Sellers should understand their typical working capital balance before entering LOI negotiations. Coming to the table with accurate working capital data prevents the surprise adjustments at closing that create last-minute friction and can delay or derail transactions.