Working Capital in Business Sales: What Is It & Is It Included in the Price?

When selling a business, most owners focus on headline numbers: valuation multiples, EBITDA, and the final purchase price. But buried in the fine print of an LOI (Letter of Intent) is one of the most critical—and misunderstood—deal components: working capital.

Whether or not working capital is included in the price (and how it’s calculated) can swing a deal by hundreds of thousands, even millions, of dollars. For sellers, ignoring it can mean leaving money on the table. For buyers, overlooking it can create liquidity nightmares the day after closing. Scenarios to how this applied in the selling of businesses varies from Main Street, to Lower Middle Market to M&A deals.

This article breaks down what working capital is, why it matters in M&A and Lower Middle Market transactions, how it differs between stock vs. asset sales, and how working capital “pegs” are negotiated in LOIs.

What Is Working Capital?

In its simplest definition, working capital = current assets – current liabilities.

For most businesses, that means:

• Current assets: cash, accounts receivable, prepaid expenses, inventory
• Current liabilities: accounts payable, accrued expenses, short-term obligations

Healthy working capital ensures the business can cover its short-term obligations and keep operations running smoothly.

Example:

• A manufacturer has $1.2M in A/R, $500K in inventory, and $300K in prepaid expenses.
• It owes $600K in payables and $100K in accrued expenses.
• Net working capital = ($1.2M + $500K + $300K) – ($600K + $100K) = $1.3M

That $1.3M is the lifeblood of daily operations—and the question in a sale is: Does it transfer with the business?

Is Working Capital Included in the Sale Price?

The answer is: usually yes—but with nuance.

Buyers expect a business to come with enough working capital to operate on Day 1 without injecting extra cash. Sellers, however, may assume that the purchase price is for the enterprise value only, and that they can strip out receivables, cash, or inventory before closing.

This disconnect creates one of the most common points of tension in M&A.

General rule:

• Buyers expect to receive a normalized level of working capital “in the box.”
• Sellers can negotiate which specific items stay and which go.

Normalized Working Capital: The Benchmark

Because businesses experience seasonal swings in receivables, inventory, and payables, most deals establish a working capital peg.

• A peg is the agreed “normal” level of working capital that the seller delivers at closing.
• It is usually calculated as an average of the trailing 12 months (or sometimes trailing 3–6 months).

Example:

If a business historically operates with $1.5M in net working capital, then the LOI might set the peg at $1.5M.

• If the seller delivers less than that at closing, the purchase price is adjusted downward dollar-for-dollar.
• If the seller delivers more, the purchase price may be adjusted upward—or the seller effectively gifts the buyer extra liquidity.

Stock Sale vs. Asset Sale: How It Impacts Working Capital

Working capital treatment often differs depending on deal structure:

1. Stock Sale

• Buyer acquires the company’s shares, stepping into ownership of all assets and liabilities (unless carved out).
• The Cash Free – Debit Free model is often seen here. Seller is responsible for paying down all liabilities, keeping most if not all the A/R and extra cash on hand with the working capital left behind negotiated in value by both parties.
• Working capital transfers by default, because all operating assets and liabilities remain inside the legal entity.
• Negotiations focus on whether cash is included (often excluded unless negotiated) and whether debt-like liabilities are deducted.

2. Asset Sale

• Buyer purchases selected assets and assumes specific liabilities.
• Working capital treatment is more negotiable.
• Inventory is included (based on volume and seasonality of the business), while payables and A/R are traditionally not be assumed. Those can be negotiated or included based on deal structure.
• Asset sales give sellers more flexibility to carve out certain items, but buyers still demand enough liquidity to run operations.

Key takeaway: Regardless of structure, buyers rarely accept a “bare” business. Some level of working capital almost always transfers. You wouldn’t buy a car without any gas, oil or wiper fluid included?

Working Capital in LOIs: The Peg & True-Up

Most LOIs include language like this:

“The purchase price assumes a normalized level of working capital (excluding cash and debt) to be delivered at closing, based on an agreed peg.”

This sets up two mechanisms:

1. The Peg: Agreement on what “normal” is. This is crucial and needs to be annotated how it will be measured and agreed up by both parties early in the transaction. We recommend if it isn’t agreed upon before the LOI that no later than 30 – 60days post LOI agreement it’s finalized. This is important for financing contingencies the buyer may have and if they need a loan for more working capital.
2. The True-Up: Post-closing adjustment once actual numbers are finalized.

Example of a True-Up Adjustment:

• Purchase price: $10M
• Agreed working capital peg: $1.5M
• At closing, working capital delivered: $1.2M
• Adjustment: -$300K

Final purchase price = $9.7M.

This protects the buyer from overpaying and incentivizes the seller to maintain working capital up to closing.

Common Seller Misconceptions

1. “I get to take all my A/R.”
   Not true. Buyers expect receivables that will fund operations. Otherwise, they’d be forced to put more cash in immediately.
2. “Cash is mine to keep.”
   Usually yes, but with exceptions. Buyers don’t expect excess cash, but they may require a minimum cash balance if needed for operations. This can vary in stock vs asset sales too.
3. “Inventory is separate.”
   Generally not. Inventory is part of the deal along with working capital and must be sufficient to meet ongoing sales needs. When there is excess inventory or “dead” inventory, adjustments can be discussed.
4. “Working capital isn’t my problem, it’s the buyer’s responsibility.”
   It matters a lot and isn’t just the buyer’s problem. Misunderstanding why there should be some carry of working capital over can swing a deal to completion or failure.

Why Buyers Care So Much

From the buyer’s perspective, paying $10M for a business without adequate working capital is like buying a car with no gas in the tank—and being asked to pay extra for fuel.

Buyers want:

• Continuity: Business runs on Day 1 without additional cash infusion.
• Risk reduction: No surprise liquidity crises.
• Predictability: Peg ensures they’re paying for normalized operations, not a business stripped bare. Some venders pay net 30, 60, 90, etc. and need sufficient funds to run the daily operations until A/R is properly collected. Assuming all vendors pay on time and in full.

Why Sellers Should Care

For sellers, ignoring working capital can mean:

• Surprise purchase price reductions at closing.
• Losing leverage in LOI negotiations.
• Post-closing disputes.

The best strategy? Get ahead of it. Sellers should analyze historical working capital before going to market, so they know what buyers will expect. If you can’t, speak to one of our team members or your CPA to help calculate.

Working Capital & Valuation Multiples

It’s important to distinguish between:

• Enterprise Value (EV): The headline price (usually EBITDA × multiple).
• Equity Value: EV adjusted for cash, debt, and working capital.

Working capital is part of the bridge from EV to Equity Value.

Example:

• EV: $10M
• Less: debt ($2M)
• Add: cash ($100K, if included)
• Less: WC shortfall ($300K)
• Equity Value = $7.8M

This bridge is where sellers often get caught off guard.

Special Cases & Nuances

1. Seasonal Businesses
   Peg negotiations are more complex. A ski resort, for example, may have wildly different working capital in July vs. January. Buyers often demand season-adjusted averages.
2. High-Growth Companies
   If growth is rapid, historic averages may understate future needs. Buyers may argue for a forward-looking peg.
3. Distressed Sales
   Buyers may negotiate minimal working capital, knowing liquidity is already tight.
4. Owner-Operated Businesses
   If owners historically under-invested in working capital (e.g., delaying payables), buyers may push for a higher peg to normalize operations.

Practical Tips for Sellers

1. Get a Sell Side Quality of Earnings (QoE) Analysis
   A good QoE report analyzes normalized working capital and prepares you for buyer expectations. This will help you find any red flags, holes or mistakes in the books now. Saving potentially up to millions in value down the road.
2. Model the Peg Early
   Don’t wait until diligence. Know the peg before you sign the LOI. If you don’t, then we recommend having an agreed upon timeline in place in the LOI (30-60days post signatures) to get it finalized.
3. Negotiate What’s Included
   Spell out whether cash, prepaid expenses, deposits, and certain liabilities are included or excluded.
4. Track Monthly Trends
   Buyers will scrutinize 12–24 months of data. Have clean records to support your position. Itemize semiannual, quarterly and yearly expenses and when they occur to help a buyer better understand the cash flow needs of the business.
5. Work with Experienced Advisors
   Brokers, M&A attorneys, and CPAs can help structure the peg fairly and avoid costly surprises.
6. Clean Financial Records
   This is why having clean and accurate accounting is so important. If those numbers are entered incorrectly, updated timely or not properly recorded, calculating working capital is going to be difficult.

Final Thoughts

Working capital may not grab headlines like EBITDA multiples, but in real-world deals it often makes or breaks seller satisfaction.

• Buyers expect normalized working capital delivered at closing.
• LOIs define the peg and true-up mechanism to ensure fairness.
• Stock vs. asset sales shift the mechanics but not the principle.
• Sellers who prepare early, analyze their trends, and negotiate clearly will walk away with fewer surprises.
• Remember, many of these pointers apply most to M&A/Lower Middle Market Transactions. Many of these aren’t as common or practiced in deals for main street level businesses.

Bottom line: Working capital is included in the price—just not always in the way sellers assume. Knowing how to plan, peg, and negotiate it is one of the most important steps in ensuring a smooth and profitable exit.

Listen to the Full Episode

In this episode, we go deeper on:

• Actionable tips,
• Real-world stories
• Deeper breakdown of the topics covered above

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