Working Capital

Working capital is the difference between a company's current assets and current liabilities, representing the operating liquidity needed to run the business.

Working Capital Formula

Working Capital = Current Assets - Current Liabilities

Current Assets:
- Cash (sometimes excluded)
- Accounts Receivable
- Inventory
- Prepaid Expenses

Current Liabilities:
- Accounts Payable
- Accrued Expenses
- Short-term Debt
- Deferred Revenue

Working Capital in M&A

Working Capital Target

• Based on historical average (often trailing 12 months)
• Agreed upon in purchase agreement
• Excludes cash and debt

Working Capital Adjustment

• Actual WC at closing vs. target
• Dollar-for-dollar adjustment to purchase price
• Settled 60-90 days post-closing

Working Capital Example

Target Working Capital:    $500,000
Actual at Closing:        $420,000
Shortfall:                ($80,000)

Purchase price reduced by $80,000

Why Working Capital Matters

• Ensures buyer receives adequate operating liquidity
• Prevents sellers from extracting cash pre-close
• Common source of post-closing disputes
• Can significantly impact final purchase price