When business owners begin preparing for a sale, many focus almost entirely on EBITDA. While earnings are certainly important and a critical part of valuation, there is another factor that can have just as much — if not more — impact on whether your deal successfully closes: net working capital.
If you are not familiar with the role working capital plays in the sales process, it is time to get up to speed. This overlooked metric can quietly stall a deal, trigger price reductions, or cause buyers to walk away entirely.
What Is Net Working Capital?
Net working capital is the difference between your company’s current assets and current liabilities. In other words, it measures the short-term liquidity and operational health of your business. Current assets typically include cash, accounts receivable, and inventory. Current liabilities often include accounts payable and other short-term debts.
Think of working capital as the lifeblood your business needs to function day to day. Buyers want to see that the company has enough cash and liquid resources to maintain operations after the transaction closes.
Why It Matters More Than Most Owners Realize
One of the biggest missteps business owners make is treating their business like a personal ATM. Over time, they pull excess money out of the company without thinking about how much capital actually needs to stay in the business to keep it running.
This can become a real problem when a buyer comes to the table.
Buyers do not want to close on a business that cannot support itself operationally from day one. If working capital is too low, the buyer will either reduce the purchase price to account for additional capital they will need to inject or they may try to renegotiate the entire structure of the deal. In some cases, it could even cause the deal to fall apart.
The EBITDA Trap
It is common for sellers to assume that EBITDA tells the whole story. While EBITDA is critical for calculating the overall value of the business, the actual amount you receive at closing can be heavily influenced by working capital.
At closing, the buyer will often expect a certain level of working capital to remain in the business. If the business falls short of this target, the difference is typically deducted from the purchase price. This is known as a working capital adjustment and it can cost sellers hundreds of thousands of dollars if they are not prepared.
In short, even if your EBITDA is strong, failing to manage working capital properly can put your deal and your payday at risk.
How To Prepare Your Business For Sale
If you are planning to sell your business within the next six to twelve months, here are key steps to take now:
Assess your current working capital position. Understand your cash cycle, collections process, inventory management, and vendor terms. Identify any irregularities or trends.
Review financial statements. Make sure your books are clean and up to date. Buyers will want to see accurate and well-organized records.
Work with a professional advisor. A qualified M&A advisor or CPA can help you determine a realistic working capital target based on your company’s historical performance and industry norms.
Avoid unnecessary cash withdrawals. Limit personal draws and do not strip the business of resources that it needs to function. This shows buyers that the business is self-sustaining and professionally managed.
Plan ahead. The earlier you begin preparing your working capital position, the more flexibility you will have when it is time to negotiate.
Set Yourself Up For A Smoother Exit
Too often, business owners make the mistake of focusing only on the top-line metrics. EBITDA matters, but it is not the only factor that affects the outcome of your business sale.
Understanding and properly managing your working capital can significantly improve your deal structure and ensure you retain the value you have worked hard to build.
Conclusion
Selling your business is about more than just chasing a big number. Buyers want transparency, sustainability, and confidence that they are stepping into a business that can operate effectively from day one. When you prepare your working capital well in advance of a sale, you not only protect your asking price, you show buyers that your business is responsibly managed and built for long-term success.
At Exit Stage Left Advisors, we help business owners look beyond the surface and plan for every financial variable that can affect their sale. If you want to increase your chances of a clean, profitable exit, it is time to start managing your working capital like the deal depends on it — because it often does.
