Working Capital in Business Acquisitions: Don't Let It Kill the Deal

Working capital is one of those deal killers that often doesn't show up until the very end. Why it gets left until the last minute is a topic for another day. What I want to talk about today is how working capital kills deals when it shouldn't. It happens when the parties become so fixated on the issue that they lose sight of the bigger picture - a good deal sitting right in front of them. They keep fighting, going back and forth, until one or both parties give up and walk away altogether.

Working Capital in Business Acquisitions: Why Is It Such a Contentious Issue?

Before we get into the main topic, let’s quickly recap what working capital is and why it often becomes such a contentious issue.

Working capital is the cash and other short-term assets a business needs to continue operating normally after settlement. It pays wages, suppliers, rent, and all the day-to-day expenses that keep the business running until cash starts coming in from customers.

The machine needs fuel

When a buyer purchases a business, they don't just buy its profit and loss statements. They buy the machine that produces those profits. And like any machine, it needs fuel to keep running. That fuel is working capital.

Every business has bills that need to be paid before cash is received from customers. Depending on the business's payroll cycle, supplier payment terms, and customer collection policies, there is often a timing gap between when cash goes out and when cash comes back in. Working capital bridges that gap.

What happens without it

Without sufficient working capital, the machine starts to stall. Employees may not get paid on time and may stop turning up to work. Suppliers may stop providing goods or services if their invoices remain unpaid.

In more serious cases, statutory obligations such as tax payments may be missed. For example, if a business fails to meet its tax obligations to the ATO for an extended period, the ATO has significant enforcement powers, including the ability to take action that could ultimately result in the business being shut down. The point is simply to illustrate why working capital is so important to the ongoing operation of a business.

That’s why the buyer is right to be concerned about there being sufficient working capital in the business at settlement. They’re not asking for extra value. They’re asking for the business to have enough cash to continue operating uninterrupted after they take over.

Sellers, on the other hand, are also not wrong for not wanting to leave cash behind to satisfy the buyer’s working capital requirement. By the time they sign a term sheet, heads of agreement, or letter of intent, they have usually gone through multiple rounds of negotiation and finally agreed on a purchase price. Naturally, they begin thinking of that figure as the amount they will walk away with.

That’s why, when they’re later told that their sale proceeds will be reduced by the amount of working capital that needs to remain in the business, they understandably resist. To them, it feels as though the purchase price is being renegotiated for a second time.

Ideally, the seller's adviser should have prepared the seller for this possibility from the outset. They should have explained that the final amount the seller receives may depend on the working capital required to keep the business operating after settlement, and helped the seller factor that into their asking price and expectations. Why this doesn’t always happen is a topic for another day.

In other words, neither side is necessarily wrong. But that’s also what makes working capital one of the most contentious issues in business acquisitions.

The question shouldn’t be who’s right. It’s whether both parties can step back, look at the transaction as a whole, and decide whether the overall deal is still worth doing.

Sadly, many otherwise good deals fall apart in those critical final moments... over working capital.

My recent car puchase - an illustration

Let me share a recent example from buying my own car. Not brand new, but new enough to be considered a wise purchase.

I don't know about you, but I don’t like buying cars brand new. I prefer two-to-three-year-old vehicles, where the price has dropped enough that the newness premium has worn off. I found one being sold by a dealer who specialised in a different brand. One of their customers had traded in his premium car of the brand I was looking to buy. So this dealer now had a car that didn’t fit their usual inventory, and naturally they wanted to move it quickly. The advertised price was already well below what similar cars were selling for elsewhere.

I negotiated the price down further - to a point where the dealer agreed, but made clear they would not be including the standard three months of registration they would typically provide in a normal sale. That’s the equivalent of a seller saying: at this price, I’m not leaving working capital behind.

I accepted that. The price was good enough that it made sense.

The unexpected extras

Then something unexpected came up. To get the car legally back on the road, I needed an unregistered vehicle permit (UVP) and a blue slip inspection before I could renew the registration. On top of that, for the few days between picking up the car and completing the blue slip and new registration, I wouldn't be able to drive it at all.

Despite those extra costs and the inconvenience, I still went ahead with the deal as originally agreed. Sure, I could have gone back to the dealer and asked for a further price reduction to account for these additional costs. I didn't. While there was a chance I might get a lower price, there was an equal chance the dealer would grow tired of my persistent negotiating. He had already given me a good price, and pushing further risked him deciding he no longer wanted to sell to me at all. Weighing up the pros and cons, I made the call to leave it.

We got the deal done.

What this means for business acquisitions

The buyer who insists on having working capital covered by the seller - even after negotiating a genuinely attractive price - is a bit like me going back to that dealer to demand they also pay for the blue slip and the UVP after already securing a significant discount. At some point, that's not protecting your position. That's annoying. And it risks losing something that was, by any reasonable measure, a good deal.

The same logic applies in reverse. A seller who refuses to leave behind any working capital - when the amount in question is small relative to what they're walking away with, or when what they're walking away with remains attractive even after accounting for the working capital - is holding the line on a minor detail while putting the entire transaction at risk.

The question both sides need to ask

I’m not suggesting that working capital should simply be ignored. It absolutely matters. Sometimes the amount in dispute is significant enough that it changes the economics of the transaction, and walking away is the right decision.

But in many cases, it doesn’t. The amount being argued over is often relatively small compared to the value of the business, the strategic opportunity, and the long-term returns the acquisition could generate.

That’s when both parties need to pause and ask themselves the same question I asked when buying my car:

“Taking everything into account, is this still a good deal?”

If the answer is yes - close it. Don’t let the pursuit of squeezing out a little more stop you from closing one.

The bottom line

Working capital disputes are rarely about the money. They’re about perspective.

Both sides arrive at the negotiating table with legitimate positions. Both feel they’re being reasonable. And in many cases, both are right - in isolation. The problem is that deals aren’t done in isolation. A transaction is the sum of everything: the price, the structure, the opportunity, the timing, and yes, the working capital. When you pull one element out and fight over it without reference to the whole, you lose the thread.

I’ve seen this play out more times than I’d like. Months of work, weeks of due diligence, late nights, strained relationships - all of it undone because neither party was willing to move on a number that, in the context of the overall deal, shouldn’t have been the deciding factor.

So before you walk away - or before you push so hard that the other side walks - ask yourself the question. Not “Am I right about the working capital?” but “Is this still a good deal?”

If the answer is yes, close it.

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About the Author

Celine Nguyen, CFA is the Founder of Zenify Investments. With over 20 years' experience spanning investment analysis, corporate finance, private equity and mergers & acquisitions, she advises business owners and ambitious acquirers on buying, selling and growing businesses. Through Zenify Investments, she helps clients navigate acquisitions from initial strategy through to completed transactions.