What is Working Capital?
Working capital is the cash and liquid assets needed to operate a business day-to-day. It represents the amount available to fund operations, pay suppliers, and cover short-term obligations.
The Working Capital Formula
Current Assets include: Cash, accounts receivable, inventory, prepaid expenses
Current Liabilities include: Accounts payable, accrued expenses, short-term debt
Working Capital in Business Acquisitions
Most purchase agreements include a working capital adjustment. Here's how it works:
- Set a "target" based on trailing 12-month average
- Calculate actual working capital at closing
- Adjust purchase price: above target = buyer pays more, below = seller pays back
Why Working Capital Matters
- Operational continuity: Ensures buyer can operate from Day 1
- Prevents manipulation: Stops seller from draining cash before close
- Fair pricing: Buyer pays for the business in operating condition
Trade Business Considerations
HVAC, plumbing, and electrical businesses have seasonal working capital needs. Summer months require higher parts inventory for AC repairs. Work with your accountant to set an appropriate trailing average that accounts for seasonality.
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