Working Capital in a Business Acquisition: How Much and Who Funds It

What working capital means in a purchase

Working capital is the cash tied up in running the business day to day: inventory on the shelf, receivables customers haven’t paid yet, minus bills you haven’t paid yet. A business that collects in 45 days but pays staff every two weeks needs cash in between. Grow the business, and that need grows with it.

In an acquisition, working capital shows up in three places:

1. What comes with the business under the purchase agreement.
2. What you add at closing, financed by the loan or funded with your cash.
3. What’s available after closing, often through a line of credit.

Getting all three right is the difference between a smooth first year and a business that’s profitable on paper and short of cash in practice. The working capital definition in our glossary covers the basic term.

What the purchase agreement delivers

Small-business sales vary a lot here, and it’s one of the most common sources of surprise.

• Asset purchases often exclude cash and receivables: the seller collects what’s owed for work already done, and you start from zero receivables. You’ll need cash to fund the first weeks of payroll and purchases before your own invoices are paid.
• Stock purchases or sales “on a cash-free, debt-free basis with a normal level of working capital” deliver a working business, with a peg: a target amount of working capital at closing, and a true-up that adjusts the price if the actual amount differs.

A true-up protects you from a seller who collects every receivable and lets inventory run down before closing. Under the current SBA rulebook, a working capital adjustment in the purchase agreement is not treated as a buyer rebate: if the true-up sends cash to you, the business may keep it for working capital, and it doesn’t have to be used to pay down the loan.

How to size it

Lenders must analyze whether the business will have adequate working capital for at least the next 12 months and look at a pro-forma balance sheet that reflects the deal, including ratios such as the current ratio. You should do the same analysis first.

1. Map the cash cycle. How many days of inventory, how long customers take to pay, how long you take to pay suppliers.
2. Look at monthly results for the last two or three years. Find the lowest point of the year.
3. List day-one needs: deposits, insurance, software, payroll before the first collections, licenses and transfer costs.
4. Add a cushion for the unexpected: the repair the seller didn’t mention, the customer who pays late.
5. Decide what’s permanent and what’s seasonal. Permanent needs fit a term loan; swings fit a line.

Term loan, line of credit, or both

In the term loan. Working capital financed in an SBA acquisition loan is repaid over the loan’s term, so it adds to the monthly payment. When a loan combines a business purchase with real estate, the working capital portion is assigned the shorter business-purchase term, not the real estate term. If working capital is half or more of the loan proceeds, the lender has to explain why that level is necessary.

On a line of credit. A line, conventional or SBA-backed, can be opened alongside the acquisition loan to cover seasonal swings. The current rules also give lenders a way to fund part of the purchase of the receivables and inventory on the line itself, within limits. Ask your lender whether that applies to your deal.

From your own cash. Cash you keep in reserve, outside the deal, is the most flexible working capital there is. Lenders look at your liquidity after closing for a reason.

One special case: in an owner buyout where the lender waives the equity requirement, it can’t also add dedicated working capital to the loan; working capital has to come from existing cash or a line of credit. See the partner buyout guide.

Common mistakes

• Assuming receivables come with the business in an asset purchase.
• Sizing from annual totals and missing the seasonal low point. Seasonal trades are the classic case; see HVAC and home services.
• Spending the reserve on the remodel that wasn’t in the budget.
• No peg in the purchase agreement, so inventory walks out the door before closing.

Build working capital into your sources and uses from the start; the acquisition calculator has a line for it, and the equity injection guide shows how it affects the cash you bring. If you’d like a second pair of eyes on the numbers, tell us about the deal.