The purchase price is not always the full amount a buyer needs. A business may also require cash for stock, payroll, suppliers, operating expenses, and the time between making a sale and receiving payment. That operating requirement is commonly described as working capital.
Why working capital matters in an acquisition
A business can show healthy revenue and profit but still experience cash pressure. If customers pay after 30 or 60 days while suppliers and employees must be paid sooner, the buyer needs enough liquidity to keep trading.
Working capital should therefore be reviewed alongside the asking price, funding structure, and expected post-acquisition costs.
Understand what is included in the transaction
Buyers should not assume that all stock, cash, debtors, or supplier balances are automatically included. The commercial terms need to identify what transfers and what remains with the seller.
A listing may state that stock is included, excluded, or valued separately. The buyer should also understand whether the stated stock level is normal, saleable, and appropriate for current demand.
Review stock quality, not only stock value
Stock can absorb a large amount of cash. Buyers should look beyond the total value and assess age, condition, turnover, seasonality, and obsolescence. Slow-moving items may have limited practical value even if they appear at cost in the records.
For service businesses, the equivalent issue may be work in progress, prepaid expenses, or deposits tied to future delivery obligations.
Examine debtors and collection patterns
Accounts receivable are only useful if they are collectible. Review how long customers normally take to pay, the proportion of overdue balances, credit notes, disputes, and concentration among major customers.
A business with growing sales may still need additional cash if debtors increase faster than collections.
Understand supplier terms and creditors
Supplier credit can support working capital, but those terms may depend on the seller’s history or personal guarantees. Buyers should establish whether key suppliers will continue the relationship and what onboarding or credit approval they require.
Also identify overdue creditors, disputed balances, or payments that may have been delayed to improve the apparent cash position before sale.
Account for seasonality
A snapshot taken in a strong trading month can be misleading. Seasonal businesses may build stock and incur expenses months before receiving peak-period revenue. Review working-capital patterns over a full cycle rather than relying on one month-end balance.
Separate normal requirements from exceptional items
One-off projects, unusual stock purchases, temporary customer delays, or exceptional supplier payments can distort the numbers. The buyer and advisers should establish a normal level that reflects sustainable trading.
Build a day-one cash plan
Before completion, estimate the cash needed for the first 90 days. Include payroll, rent, supplier payments, insurance, taxes, marketing, maintenance, debt repayments, and a reasonable contingency. The plan should also reflect when customer receipts are expected.
Questions buyers should ask
- What stock, debtors, creditors, and cash are included?
- How old is the stock and how quickly does it turn?
- What are the normal customer collection periods?
- Will current supplier credit terms continue?
- How does working capital change during the year?
- What cash buffer is needed immediately after takeover?
Final thought
Working capital is not a technical footnote. It affects whether the business can continue operating comfortably after the transaction. Buyers should discuss it with the broker and obtain appropriate accounting and funding advice before finalising an offer.
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