Working Capital: What It Means for Business Buyers

What Is Working Capital?

Working capital is the difference between a business's current assets and its current liabilities.

Current assets include cash, accounts receivable, and inventory. Current liabilities include accounts payable, accrued expenses, and short-term debt due within 12 months.

The formula: Working Capital = Current Assets - Current Liabilities

A business with $300K in current assets and $150K in current liabilities has $150K in working capital. That $150K is what keeps the lights on between the time you pay vendors and the time customers pay you.

How Does Working Capital Apply to SBA Acquisitions?

When you buy a business, you are buying an operating machine, not a static asset. That machine needs fuel to run from the moment you take the keys.

Without adequate working capital, a buyer can close on a profitable business and still run out of cash in the first 60 days. This happens more often than most brokers will tell you.

SBA 7(a) loans can include a working capital line in the financing structure, but this is separate from the working capital provision in the purchase agreement. The purchase agreement governs how much working capital the seller must leave in the business at closing. The SBA loan governs how much additional liquidity the lender provides.

Most purchase agreements for SBA acquisitions target a working capital peg equal to the business's average monthly working capital over the prior 12 months, sometimes the prior 3 months. The logic is simple: deliver the business in the same operating condition it has historically run in.

How the peg mechanism works:

1. Buyer and seller agree on a target working capital amount before signing the purchase agreement.
2. At closing, the actual working capital is measured.
3. If actual working capital is below the peg, the purchase price is reduced by the shortfall (or the seller cuts a check).
4. If actual working capital is above the peg, the buyer pays the difference to the seller.
5. A true-up period of 30 to 90 days follows closing to finalize the calculation once all invoices are settled.

This mechanism protects both sides. The buyer does not inherit an underfunded business. The seller does not leave more cash in the business than required.

Service Business vs. Inventory Business: Why the Difference Matters

Working capital needs vary considerably depending on the business model.

Service business example (HVAC company, $2M revenue):

A service business collects cash relatively quickly. Receivables cycle in 30 to 45 days. Payables to vendors and subcontractors are typically 30 days. Working capital needs are moderate, usually 4 to 6 weeks of operating expenses, or roughly 8% to 12% of annual revenue for a well-run operation.

For a $2M revenue HVAC company doing $400K in EBITDA, adequate working capital might be $120K to $180K.

Inventory-based business example (industrial distributor, $3M revenue):

A business carrying physical inventory has a longer cash conversion cycle. Inventory is purchased, held, then sold, then collected. Working capital needs are higher, often 15% to 25% of annual revenue depending on inventory turns. A distributor doing $3M in revenue might need $450K to $750K in working capital to operate without strain.

If a seller drains inventory in the weeks before closing to boost cash, the buyer walks into a business that cannot fill orders. This is a real risk, and the working capital peg is the primary protection against it.

Deal Math: Working Capital in a $1.5M Acquisition

As of Q1 2026, here is how working capital fits into a typical mid-market SBA acquisition:

These are rough estimates based on market data. Actual terms depend on individual qualification and lender.

In this example, the $30K shortfall reduces the purchase price dollar-for-dollar. The buyer does not absorb the seller's failure to maintain working capital. The peg mechanism does its job.

Common Working Capital Disputes at Closing

Based on Regalis Capital's analysis of recent acquisitions, working capital disputes are among the most common sources of friction in the final 30 days before a close.

The most frequent issues:

Seller timing manipulation. Sellers sometimes accelerate collections or delay payments in the weeks before the measurement date to inflate working capital above the peg, then pocket the excess in a true-up. Buyers should request working capital snapshots at multiple points, not just the closing date.

Inventory valuation disagreements. For inventory-heavy businesses, buyers and sellers often disagree on what inventory is actually sellable. Obsolete or slow-moving inventory gets counted at full value. Define "eligible inventory" in the purchase agreement before signing.

Receivables quality disputes. Not all accounts receivable are collectible. A $200K receivables balance that includes $80K past due 90 days is worth far less than face value. The working capital definition should specify aging thresholds for eligible receivables.

Definitional mismatch. The buyer and seller sometimes calculate working capital using different line items. Get the exact definition agreed in the letter of intent, not just the purchase agreement.

Related Terms

• Due Diligence
• SBA 7(a) Loan
• Letter of Intent (LOI)

Frequently Asked Questions

How much working capital should I expect when buying a service business?

For most service businesses, adequate working capital runs between 4 and 8 weeks of operating expenses, roughly 8% to 15% of annual revenue. A $1.5M revenue business might require $120K to $225K in working capital at closing. The exact amount depends on the billing cycle, payroll frequency, and vendor payment terms specific to that business.

Can working capital be financed through an SBA 7(a) loan?

Yes. SBA 7(a) loans can include a working capital component on top of the acquisition financing. However, the working capital provision in the purchase agreement is separate. It governs what the seller delivers at closing. The SBA working capital line is a separate injection of liquidity. Buyers should not rely on an SBA working capital line to cover a shortfall the seller was supposed to fund.

What happens if the seller does not meet the working capital peg at closing?

The purchase price adjusts downward by the shortfall amount, or the seller funds the gap out of closing proceeds. Most purchase agreements give the buyer the right to withhold the shortfall from the seller's proceeds rather than waiting for a post-close payment. This is why defining the working capital peg and measurement methodology precisely in the LOI matters well before you reach the closing table.

Ready to Structure Your Next Acquisition Correctly?

Working capital is one of several deal mechanics that can quietly erode value if not negotiated correctly from the start. Regalis Capital's deal team reviews 120 to 150 deals per week and structures working capital provisions, seller notes, and SBA financing terms in every engagement.

If you are evaluating a business acquisition and want to make sure the deal structure holds up from LOI through close, start with a free deal assessment.