Working capital is the plumbing of the business: the inventory on your shelves, the receivables your customers owe you, the payables you owe your suppliers. It is not part of your earnings, so it never appears in the SDE-times-multiple math that produced your price. But the business cannot run without it, and at closing it has to end up somewhere. Whether it conveys with the business, stays with you, or gets settled dollar for dollar is worth real money in either direction, and it is the single most common closing-stage fight on Main Street, because it is the term LOIs most often leave silent.
This guide covers how bigger deals handle the question, what the honest norms are for deals like yours, where the fights actually start, and the sentences to put in your letter of intent so the wire matches the handshake. It is education, not legal or accounting advice; your attorney and CPA should bless the specific language.
How the big deals do it, and why yours may differ
In mid-market and private equity transactions, a working capital peg with a post-closing true-up is simply standard. The logic is fair: the buyer is paying for a running business, and a running business needs fuel in the tank. The peg ensures the seller does not quietly drain the tank, collecting the receivables hard, running inventory to the floor, stretching the payables, in the final months before handing over the keys.
Main Street runs on a different convention, or rather on several, which is the problem. The most common shape for a sub-$5 million asset sale is some version of cash-free, debt-free: the seller keeps the cash and collects their own receivables, pays off the debts, and the business conveys with the assets it needs to operate. But whether "the assets it needs to operate" includes inventory at the agreed price, or inventory counted and paid for separately at closing, or a defined level of net working capital, varies deal by deal and broker by broker. Every one of those conventions is workable. What is not workable is each side assuming a different one, which is exactly what a silent LOI produces.
For what it is worth, here is the practical default we would argue for on a typical Main Street deal: the price includes a normal, defined level of operating inventory and the working capital the business needs to run a routine month; the seller keeps cash and pre-closing receivables and clears all debt; and anything abnormal, an inventory spike, a prepaid contract, gets named and handled explicitly. No formal peg, no true-up machinery, just the sentence in the LOI. Below roughly $2 million of price, the peg's precision usually is not worth its friction. As deals get larger, or inventory-heavy, the mid-market mechanics start earning their keep.
Worked Example
The $63,000 that was never negotiated
A wholesale business sells for $1.2 million. The LOI says nothing about working capital. Both sides feel confident about what "everybody knows" is included.
| Inventory on the shelves at closing | $180,000 at cost |
| Seller's assumption | Inventory is extra, counted and paid at closing |
| Buyer's assumption | Inventory is included; that is what the 2.8x paid for |
| Receivables outstanding | $95,000 (seller assumed she keeps them) |
| The compromise, negotiated in the final week | Buyer pays for inventory above a $117,000 baseline |
| Net swing vs. the seller's assumption | -$63,000 |
Neither side lied. The seller priced the business assuming inventory rode on top; the buyer modeled the deal assuming it did not. The person who wins this argument is usually the one with more stamina in week eleven, which is usually the buyer, because the seller is emotionally closed and everyone knows it. One sentence in the LOI would have settled it in month one for free.
Where the fights actually start
Inventory is most of them. What counts (obsolete stock, slow movers, opened cases), how it is valued (cost, market, or someone's memory), and who counts it. If your business carries meaningful inventory, agree in the LOI on the valuation method and on a physical count by a neutral party at closing. If your inventory has a seasonal swing, name the expected range, because a peg or baseline set off the wrong season is a built-in dispute.
Receivables are the second. The clean Main Street convention is that the seller keeps pre-closing AR and collects it themselves; the buyer starts fresh. It is simple and it usually works. The alternative, buyer collects and remits, invites six months of awkward accounting with a person you no longer have leverage over. If your customers pay slowly, expect the buyer to discount what your AR is worth or to insist you keep it.
The drain, and its opposite. Buyers worry the seller strips working capital before closing; sellers, it turns out, should worry about the mirror image, being asked to leave behind more than normal. Both are solved the same way: define "normal" from the trailing twelve months of your own books, in writing, before exclusivity.
The true-up. If the deal does use a peg, insist the measurement method, accounting basis, and dispute process are defined, and that the true-up window is short. And a note for SBA-financed deals: a common misconception says working capital adjustments are not allowed in 7(a) transactions. The purchase price must be fixed and determinable, but standard closing prorations and properly drafted true-up mechanics appear in SBA deals routinely; the drafting just has to respect the financing. This is attorney territory, which is the point of settling it early.
What this means for your preparation
Working capital is also a place where preparation pays before any negotiation starts. A buyer and their lender will read your balance sheet history to decide what "normal" looks like, so the same clean books that defend your SDE defend your working capital baseline. Know your own numbers before the buyer does: your trailing-twelve-month average inventory, your AR aging, your seasonal swing. The seller who can produce those figures sets the definition of normal. The seller who cannot, accepts the buyer's.
Common questions
Does my asking price include inventory or not?
There is no default; there is only what you decide and write down. Both conventions are common, which is exactly why silence is dangerous. Decide before you list: for most operating businesses, pricing with normal inventory included is cleaner and buyers expect it; for businesses with large, volatile, or commodity inventory, price the operation and handle inventory at cost via a closing count. Whichever you choose, your listing, CIM, and LOI should all say the same thing.
What is a normal amount of working capital to leave in the business?
The honest benchmark is your own trailing twelve months: the average net working capital the business actually ran on. A rougher shorthand, one to three months of operating expenses, appears in deals where the books are too thin to average. Any request materially above your own historical average is not a working capital provision, it is a price reduction wearing one's clothes, and you should negotiate it as such.
The buyer's lawyer added a working capital peg in the purchase agreement that was never in the LOI. Now what?
Push back, and use the LOI to do it. Terms that appear for the first time in the purchase agreement draft are proposals, not obligations, and "that was not our agreement" is a complete sentence. If the buyer has a legitimate concern behind the late addition, solve the concern narrowly, an inventory floor, a no-drain covenant for the closing period, rather than accepting the full mid-market machinery in week ten.
Do I really keep the cash in the business at closing?
In the standard cash-free convention, yes: you sweep operating cash before closing, and the buyer funds their own opening balance. Two cautions. Customer deposits and prepayments for work not yet delivered are not your cash; they convey with the obligation, and buyers check. And sweep gradually rather than on the last day, because a balance sheet that empties overnight before closing reads badly to a lender who is deciding whether this business is being handed over healthy.
Settle it before it costs you
Every term defined before a buyer ever sees the deal.
BizTender's deal process puts the working capital terms in writing at the LOI stage, with your trailing numbers already organized so "normal" is defined from your books, not the buyer's assumptions. The wire at closing matches the number you shook on.