Net working capital (NWC) is one of those M&A concepts that almost no business owners have heard of until they decide to sell their company.
Even if you’ve heard the term tossed around, there’s a good chance you don’t quite understand what it means or, more importantly, how it will impact your final purchase price.
And it will impact it…either positively or negatively.
Unwitting sellers who aren’t familiar can find their purchase price being reduced right before close – a surprise no one wants.
While NWC is a complex subject with nuance that can be viewed differently buyer to buyer, even a basic understanding can put you in a better position.
So, What Is Net Working Capital?
In simple terms, net working capital is the money your business needs to run day to day. It’s the difference between your current assets and your current liabilities.
Here’s the high-level formula:
Net Working Capital = Current Assets – Current Liabilities
Current assets typically include:
- Accounts receivable (invoices you’ve issued but haven’t been paid yet)
- Prepaid expenses (like rent paid at the beginning of the month)
- Inventory (if applicable)
- Rarely: cash (though this is often excluded)
Current liabilities typically include:
- Accounts payable (bills you owe)
- Accrued expenses (like payroll you haven’t paid yet)
- Deferred revenue (if clients have paid you in advance)
Think of it as the financial “fuel” needed to keep the engine running.
Why Buyers Care About NWC (And You Should Too)
Here’s the part most sellers miss: Buyers don’t just pay for your company. They expect you to leave behind enough “fuel in the tank” to keep it running after they take the keys.
That “fuel” is working capital.
During due diligence, the buyer and seller agree on a target amount of net working capital that the seller should leave behind at close, usually an average calculated over a period of time. This is called the working capital PEG.
If the amount you deliver at close is less than that PEG, your purchase price is reduced. If it’s more, the difference will be added to your purchase price.
It’s not uncommon for these adjustments to be 5-6 figures. That is why it’s important to understand and be prepared for this calculation: so you can improve your chances of a positive impact (or at least a neutral one).
Let’s look at a quick example.
A Simple NWC Example
Let’s say you and the buyer agree on a net working capital PEG of $500,000.
But when closing rolls around, your actual working capital is only $450,000.
In most cases, the buyer will reduce your purchase price by the $50,000 shortfall because they’ll need to use their own cash to make up the difference.
You can think of it like selling a car. If the buyer assumes it comes with a full tank of gas, but you hand it over on empty, they’ll expect a price break.
Two Things Most Sellers Get Wrong About NWC
1. It’s Not “Cash Left Behind”
Often, sellers think that net working capital is the amount of cash you have to leave in the business at close. That couldn’t be less true.
Most deals are cash-free/debt-free transactions, where any cash in the business is yours to keep and therefore excluded from working capital calculations altogether. What buyers are really looking for is enough operational liquidity (in the form of receivables, prepaid expenses, and other current assets) to keep the business running smoothly without an immediate cash infusion.
Understanding the full working capital picture early (and what actually affects it) can keep your focus in the right places and save you from painful surprises at the last minute.
2. You Can (and Should) Negotiate the PEG
Too often, sellers assume the buyer’s proposed PEG is final. It’s not
Your M&A advisor and CPA should analyze your historical working capital over the trailing 12, 6, and 3 months, flag any seasonal shifts or one-time anomalies, and push for a PEG that reflects a fair average.
This isn’t about nickel-and-diming the buyer. It’s about making sure your transaction reflects the true, consistent reality of how your business operates.
So, What Should You Do Now?
If you’re even thinking about a sale in the next 1–2 years, here’s how to get ahead of working capital surprises:
- Start tracking your net working capital monthly so you understand your trends.
- Avoid large fluctuations in payables or receivables that could skew your averages (unless they’re part of a strategic decision). For example, don’t let AR go over 120 days, and don’t pay bills in advance of their due dates.
- Make sure your financials are accrual-based, not cash-basis, so your NWC calculations are accurate.
- If you’re still unsure (don’t worry, most are), consider joining the waitlist for my digital course, Getting Your Financials Ready for a Sale, where I go much further into detail on this topic so you can take home every dollar possible.
The bottom line? Deals start and end with financials. And net working capital is one of those hidden levers that can quietly move your take-home number up or down.
The earlier you understand it, the better you can prepare and negotiate with confidence.
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