Why Working Capital Can Make or Break Your Exit

Welcome back to the Mid Market Insider!

Today, we’re diving into the importance of Working Capital and why it can make or break your exit.

Working capital often gets overlooked until later on in the negotiations.

Most buyers (especially those with experience) expect an adequate level of working capital to come with the business at closing.

If you try to strip it out, you’ll either lower your price or lose buyers altogether.

Sophisticated buyers simply won’t pay a premium for a company they must immediately re-fund.

But why is working capital included?

The business needs:

• Cash

• Inventory

• Receivables

On hand to function from day one.

Think of working capital as the gas in your car.

You can sell a car with an empty tank, but the next owner won’t get far before they have to refuel.

It’s the same principle with cash, inventory, and AR in a business sale.

Including it makes your deal smoother, faster, and more attractive.

Without it, buyers would have to inject more money right after closing just to keep things running.

That’s a different transaction than what was negotiated.

Experienced buyers will factor that into their offer.

Some brokers or advisors may tell you working capital’s negotiable, or even not included.

Technically, that’s possible and has happened in smaller or less sophisticated deals.

But be aware:

The wider your buyer pool, the likelier it is that working capital will need to be in the business.

Or else you’ll weaken your negotiating position.

Historical averages matter here.

Buyers look at what the business has required to generate its historical cash flow.

If you want your sale to be attractive and marketable to multiple buyers, assume an adequate working capital "peg" will be part of the deal.

Don’t let this be a last-minute surprise.

Address it early.

The bottom line:

Stripping out working capital rarely works in your favor.

You’ll drive away qualified buyers or face valuation cuts.

Plan for a fair working capital hand-off if you want a straightforward transaction.

It’s one of those “little things” that make a big difference when you’re at the negotiating table.

That’s all for today’s newsletter! Thanks for reading!

📅 Next Week:

In next week’s edition, I’ll be diving into the #1 mistake founders make when valuing their business and why smart founders don’t fall in love with their EBITDA.

Keep building,
Nick

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