Mergers & Acquisitions
What Is Working Capital?
Working capital represents the short-term liquidity of a business and is calculated as:
This includes items like accounts receivable, inventory, and accounts payable. In mergers and acquisitions (M&A), buyers expect the business to be delivered with a “normal” level of working capital to ensure smooth operations post-close
Working Capital Threshold (Target)
The working capital threshold—also called the target or minimum working capital—is a benchmark negotiated between buyer and seller. It reflects the amount of working capital needed to operate the business as a going concern. This threshold is typically based on historical averages and seasonal trends
Working Capital Holdbacks
A working capital holdback is a portion of the purchase price withheld at closing to account for post-close adjustments. If the actual working capital delivered is below the agreed threshold, the buyer retains part of the holdback. If it exceeds the target, the seller may receive additional compensation
Final Working Capital Calculation
After closing, a final working capital calculation is performed—usually within 60–90 days. This involves reconciling actual current assets and liabilities as of the closing date. Disputes may arise over accounting methods, timing of transactions, or inclusion of specific items, so clarity in the purchase agreement is essential.
Tips for Sellers Negotiating Working Capital
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Know your numbers: Analyze historical working capital trends and seasonal fluctuations.
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Define inclusions/exclusions: Clearly outline which accounts are included in the calculation.
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Negotiate a fair threshold: Avoid setting targets too high or too low—both can lead to disputes.
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Use normalized averages: Base the threshold on a trailing 12-month average to reflect typical operations.
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Document everything: Ensure the purchase agreement specifies calculation methods and dispute resolution procedures.