Definition
Working capital is the money tied up in running a business day to day: mainly stock (inventory), money owed by customers and prepaid costs, less money owed to suppliers and other short-term bills. In accounting terms it is current assets minus current liabilities. In a sale it is usually defined more narrowly, often excluding cash, borrowings and tax, and the purchase agreement sets out exactly what counts.
Worked example
Harbourvine Wholesale Ltd is a fictional UK drinks distributor. At the end of a normal month it has:
- stock of £300,000
- trade debtors (accounts receivable in the US) of £250,000
- trade creditors (accounts payable in the US) of £200,000
Working capital = £300,000 + £250,000 minus £200,000 = £350,000.
That £350,000 is money the business needs simply to keep trading. If the seller runs stock down and chases every customer for payment before completion, the business you receive may need an injection of cash in its first weeks.
Why buyers care
Many listings do not say whether working capital is included in the asking price. A price that looks fair can become expensive if you must fund a normal level of stock and customer balances on top of it. Agree early what level of working capital comes with the business and how it will be measured at completion (closing in the US).
Seasonal businesses need extra care, because working capital on the completion date may sit far above or below its normal level. Look at month-end balances across at least a year, and watch for suppliers being paid late to make the cash position look healthier than it is.
The asking price is the price a seller or broker puts on a business when it is listed. It is an opening position, not a valuation, and what it includes varies from listing to listing.