There is often confusion over the issue of Working Capital (WC) in a transaction.
Buyers usually expect a historical level of WC as part of the transaction, and it is already accounted for in the offering price.
There are a few ways to compute the twelve-month average, and they all end up with the same value. Working capital is defined as inventory plus accounts receivable, less accounts payable.
At times, minor items can be a part of the calculation, but it is important to note that cash and cash equivalents are not part of the transaction or offering price.
The mechanics of WC are simple; a target number is computed and agreed on before the closing date. Any deviations from the WC target (and there always are) adjust the transaction value up or down, dollar for dollar.
For example, if the WC target is $750K, and as of closing, the actual value of WC is $850K, the transaction is increased by $100K.