The short version
- Most small deals start debt free and cash free, so you pay off business debt at closing
- Lenders may want working capital left in the business
- If the buyer funds working capital, the effective price rises
- Agree on inventory and receivables in writing before the contract
Debt Free and Cash Free
A common starting point is that the seller pays off business debt at closing and keeps the cash, while the buyer takes the business with its normal operations. Terms vary, so confirm them in the letter of intent.
The broker commission, attorney fees and debt payoff come out of proceeds. Plan around the net number, not the headline.
What Working Capital Means
Working capital is the money a company needs for daily operations: inventory, receivables and cash, less what it owes soon. A buyer needs enough of it to pay suppliers and staff in the first months.
A lender may ask that some seller cash stay in the business. If the buyer funds it instead, the effective price rises, and buyers factor that into their offers.
Inventory
Heavy inventory compared to earnings is a yellow flag. Banks may balk, and buyers may require a physical count before closing and pay dollar for dollar for what is counted.
Right size slow stock before you list, and agree on how obsolete items are valued.
Receivables and Payables
In an asset sale, the seller usually keeps cash and receivables for work already done. If the contract says otherwise, the price should reflect it. Settle this early to avoid a dispute at the table.
Seasonality
Build a monthly working capital forecast. It exposes the low points in the year, and a buyer who sees them early feels safer. Companies in farm and packing trades should look closely, as discussed on the farm service page.
Checklist
- List which assets transfer, including vehicles and tools
- Decide what happens to cash, receivables and deposits
- Agree on an inventory count method
- Confirm who pays accrued items such as vacation pay
Also read the brief on seller notes and the page on the final return.
Ask your attorney to write the working capital target as a number or a clear formula, not a vague phrase, so the final adjustment does not become an argument.
Why This Matters at the Table
Two offers with the same headline price can leave very different amounts in your pocket. One may ask you to leave cash in the company, while the other may not. Compare offers on net proceeds, not the first number.
Ask your CPA to build a one page comparison before you sign a letter of intent.
Want a first estimate? Get a free private valuation.