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Brent and Emily break down why working capital is one of the most contentious parts of a business sale. They explain how current assets, current liabilities, cash, debt, inventory, and seasonality all affect the amount a buyer expects to remain in the business at close. The episode focuses on how to think about the balance sheet versus the income statement when negotiating a transaction.
Buy-side investors, ETA buyers, and business sellers who need to understand how working capital is negotiated in acquisitions and why it often changes the headline economics of a deal.
Working capital disputes usually come from the fact that balance-sheet items move every day, so the target is never perfectly static at signing or closing.
A buyer may pay for inventory and receivables through the purchase price and then still require enough cash to fund the first payroll after close.
Seasonality, slow-paying customers, bulk purchasing, and temporary vendor terms can all distort normalized working capital and should be adjusted for explicitly.
A business that grows fast often needs more inventory and financing, so higher working-capital needs can be a sign of growth rather than inefficiency.
Cash and debt have to be analyzed separately from operating working capital because a business still needs cash to run, and long-term debt is handled differently from transaction debt.
If a seller changes customer terms right before a sale to reduce working capital, a buyer will likely treat that as a business-model change rather than a clean normalization.
The right working-capital target is usually tied to what the business historically needed to operate, plus a cushion, rather than a formula imported from another company.
The proper working-capital level is the amount the business historically needs to keep current operations running, plus a reasonable cushion. The balance sheet should be read in the context of how the business actually operates, not as a generic template.
When to use: Use this when negotiating a target working-capital peg or evaluating whether an adjustment is truly abnormal.
Working capital is commonly defined as current assets minus current liabilities, with AR, inventory, and prepaid expenses offset by AP, short-term debt, and accrued expenses.
Emily gives the standard accounting definition at the start of the episode.
Transactions are often structured on a debt-free, cash-free basis even though a business still needs some cash to make payroll.
The hosts explain why cash must be handled separately from the operating business.
Long-term debt is typically removed in a sale, while a working-capital line of credit used to fund inventory or receivables is treated as part of the operating model.
They distinguish transaction debt from business-model financing.
A seller who changes terms from historical X terms to new Y terms shortly before closing is altering the business model, not just the balance sheet.
They discuss attempts to reduce the working-capital target by changing customer payment terms.
Growing companies often need more inventory and corresponding financing as revenue scales.
They use growth and inventory buildup as a reason working-capital needs can rise over time.
Normalize working capital by comparing the balance sheet to the company’s historical operating pattern, not by applying a generic rule.
Why: Temporary distortions from seasonality or special customer terms can make the current balance sheet misleading.
Ask who funds the first payroll after close before finalizing deal terms.
Why: A business cannot operate without initial cash, and misunderstanding this can create a post-close capital shortfall.
Separate transaction debt from operating debt when underwriting cash flow.
Why: Interest tied to inventory or receivables financing is part of the business model, while acquisition debt is not.
Review customer terms, supplier timing, and inventory changes with the accounting team before agreeing to a working-capital peg.
Why: Those items often explain why the balance sheet looks unusually high or low at closing.
Expect to leave a cushion of working capital in the business rather than trying to extract every dollar.
Why: The company needs room for normal fluctuations and non-cash obligations such as covenants or bonding requirements.
Brent describes almost closing the deal without realizing the business would need cash to make the first payroll. A lawyer’s question about funding working capital exposed a gap in the contract terms and forced a last-minute fix.
Lesson: Always confirm who supplies the cash needed to operate immediately after close.