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January 9, 2026
Tax Planning for a Profitable Business Exit
February 9, 2026Working capital adjustments are one of the most misunderstood and often underestimated parts of M&A deal negotiations. Sellers naturally focus on valuation, purchase price, and overall deal structure. Buyers, on the other hand, pay very close attention to one key question: how much working capital is staying in the business at closing?
And it makes sense. Working capital isn’t just an accounting concept. It directly impacts whether the company can run smoothly the day after the transaction closes.
If a business is undercapitalized at closing, the buyer may need to inject cash immediately just to cover payroll, pay vendors, or keep inventory flowing. If the business is overcapitalized, the buyer may feel like they’re paying extra for assets they didn’t intend to fund. Either way, working capital can become a friction point that leads to last-minute negotiation pressure, post-close disputes, or purchase price adjustments that reduce the seller’s net proceeds.
What Buyers Expect at Closing
Most buyers expect a “normalized” level of working capital to be delivered with the business. In simple terms, they want the company to have enough day-to-day financial resources to operate as usual, without disruption.
Working capital generally includes items like accounts receivable, inventory, and accounts payable sometimes with specific treatment for cash depending on the deal structure. Buyers will look at these components together and ask whether the level being transferred is typical for the business based on historical performance and seasonality.
The problem is that working capital can easily be distorted right before closing.
Sometimes it’s unusually high because inventory has been built up in advance of a busy season, or because payments to vendors were delayed. Other times it’s unusually low because of aggressive cash management, last-minute expenses, or one-time events that make the balance sheet look leaner than usual. Even if none of it was intentional, these swings can quickly trigger buyer concerns and create negotiation tension.
Why “Normalized” Working Capital Is So Important
Normalized working capital is essentially the amount of working capital the business needs to run under typical operating conditions. It’s the baseline that helps both parties agree on what’s fair and what’s “business as usual.”
To determine that baseline, you have to look beyond a single month or a single snapshot in time. The best approach is to review historical working capital trends, identify patterns, and separate normal seasonality from one-off anomalies.
For example, if your business consistently builds inventory in Q4, that’s not a red flag, it’s just your operating rhythm. If receivables always slow down during the summer months, that should be expected and explained. The key is having the data and the story aligned, so buyers understand what they’re seeing and why.
Buyers don’t just want a number. They want a rationale they can trust.
How to Strengthen Your Position in Negotiations
Working capital becomes far easier to defend when you’ve done the work upfront. That means understanding what’s normal, documenting your trends, and preparing a clear explanation that holds up under scrutiny.
This is where working closely with your financial advisor makes a difference. Together, you can model multiple scenarios, calculate a reasonable working capital target, and prepare a working capital “peg” that reflects real operating needs not an arbitrary estimate.
A strong working capital analysis should connect directly to your financial statements and include reconciliations that make it easy for a buyer to follow the math. The more transparent and well-supported your working capital position is, the more negotiating leverage you’ll have. Just as importantly, you reduce the chances of post-close adjustments that quietly chip away at what you thought you were taking home.
Working Capital Is More Than a Financial Detail
It’s also important to understand how working capital ties into the rest of the deal terms. Working capital can affect purchase price adjustments, escrow provisions, and closing mechanics. And if the working capital clause in the purchase agreement is vague, it can create unnecessary ambiguity and fuel disagreements after closing.
When the terms are clearly defined, everyone knows what success looks like. When they aren’t, working capital can turn into the kind of issue that delays closing or creates friction when the relationship should be shifting into a smooth transition.
In many deals, working capital is a key factor that can help you keep more of what you earn and avoid unexpected issues at closing.
The Bottom Line
A clear, well-documented working capital position tells buyers that your business is operationally sound, financially disciplined, and ready for handoff. When you address working capital early before it becomes a negotiation problem you build confidence, reduce risk, and help protect the value you’ve worked hard to create.
Working capital surprises can cost you. Let’s model your needs and negotiate from a position of strength.
Contact Touchstone Advisors for a confidential conversation about our Exit Advantage℠ program—a proven 10-step process designed specifically for business owners planning to exit in the next 2 to 5 years or beyond. This strategic framework helps you prepare your company for sale, protect your legacy, and maximize the value of your life’s work.
To learn more, visit www.myexitadvantage.com
Steven Pappas, M&A MI
Partner, Managing Director
Touchstone Advisors
860-669-2246
spappas@touchstoneadvisors.com
