Adequate working capital is generally assumed to be part of the transaction in lower mid-market transactions.
This can be a source of disagreement and misunderstanding.
From a transactional point of view, working capital usually includes inventory plus accounts receivable less accounts payable.
Cash is rarely included and short term debt, such as lines of credit are cleared and replaced by the new owner.
Working capital can be measured in various ways, including industry norms, the specific company’s operating cycle, bank requirements or other yardsticks.
If a company is valued on implied or projected growth, transactional working capital can be based on future needs.
The level of working capital can be negotiated, particularly if excess levels are held within the company. Some business owners view accounts receivable as “their” work and have difficulty with this aspect, but in reality the work done and receivables generated were produced by the business organization that they have built. That is how acquirers see it.