Working capital in a business sale

Headline price gets the attention. Working capital often moves more cash at completion than ownersexpect. In UK and US SME sales that close on completion accounts, the “peg” the target net working capital the buyer assumes you will deliver can shift the cheque by tens or hundreds of thousands. Understanding it early is one of the quietest ways to protect value without a public process.

What a working capital peg is

Most mid-market deals are struck on a cash-free, debt-free basis with a normal level of working capital. That means enterprise value is adjusted so the buyer does not inherit an empty cash cycle or pay twice for cash that should have been left in the business. The peg is the agreed “normal” typically a formula based on a trailing average of receivables, inventory, payables, and related balances, measured against definitions in the sale agreement.

At completion (or when completion accounts are agreed), actual working capital is compared to the peg. Above the peg, the seller usually receives an upward price adjustment. Below it, the price steps down. The mechanism is mechanical once definitions are locked; the negotiation is about what counts, what is “normal,” and which items are treated as debt-like rather than trading balances.

Why buyers set a target

Buyers are not trying to trap you with accounting trivia. They are trying to buy a business that can keep trading without an immediate cash injection.

A fair peg protects both sides. You keep the surplus above a normal level; the buyer inherits a business that can pay suppliers, fund inventory, and collect from customers in the ordinary course. Long-term owners care about that continuity as much as the headline multiple.

Typical surprises for owners

Several items regularly catch sellers off guard once diligence and completion accounts begin:

• Debt-like items — overdue tax, customer deposits treated as deferred income, accrued bonuses, or long-dated payables that buyers reclassify out of “working capital” and into debt. Each reclassification can reduce the price even when the peg itself looks fair.
• Deferred revenue — prepaid contracts, retainers, or subscription balances. Buyers often treat these as a liability to be delivered post-close, not as free cash in the business.
• Overdraft versus cash — gross cash in one account and an overdraft elsewhere. Cash-free, debt-free mechanics usually net these carefully; informal “we always run an overdraft” habits do not survive the SPA schedule.
• Inventory quality — obsolete, slow-moving, or poorly counted stock. A peg that includes inventory at book value can still produce a write-down if quality-of-earnings work challenges the balance.

These issues surface in a private data room and completion accounts — not only in a public auction. Seeing them yourself early makes them feel like preparation, not a late renegotiation.

How to prepare without disrupting the business

Preparation is mostly definitional and private. Build a simple working-capital bridge — monthly balances for the last twelve to twenty-four months, with clear lines for trade receivables, inventory, trade payables, and other items your accountant would expect a buyer to debate. Agree internally what “normal” looks like across the season, not just at year-end. Align your management accounts with the definitions you would be comfortable putting in a SPA schedule, so diligence is reconciliation rather than invention.

Resist the urge to strip cash or stock unnaturally in the months before a process. Aggressive collection, deferred purchases, or inventory starvation can raise cash today and destroy the peg narrative tomorrow — and a serious buyer will notice. Steady, ordinary-course behaviour is usually worth more than a short-term cash grab that has to be unwound in completion accounts.

If something is genuinely debt-like or one-off, document it early. Surprises cost more under exclusivity than in a calm first conversation.

Why a long-term buyer may prefer a fair peg over a fight

Financial buyers under pressure sometimes treat the peg as another lever to re-trade. Long-term buyers who intend to hold the business, keep people continuity, and protect culture usually prefer a peg that is fair and durable. A fight that extracts a few points of working capital at the cost of trust, management goodwill, or post-close friction is a poor bargain when you plan to own the firm for years.

That does not mean a long-term buyer ignores the numbers. It means they would rather lock clear definitions and a clean completion accounts process than win a last-minute argument. For owners: prepare for substance, not theatre.

Confidentiality

Almost all of this work can be done privately with your accountant or a trusted advisor. You do not need to announce a sale or brief the shop floor. A quiet bridge, consistent definitions, and an honest view of seasonal cash are enough to enter a confidential conversation without guessing what the peg will do to net proceeds.

If you are weighing a confidential exit and want a calm read on how working capital might affect a sale of your business without contacting staff, customers, or competitors — a short private call is enough.