Unrealistic Working Capital

General
February 5, 2026

One of the most common—and most damaging—misconceptions in Main Street transactions is a seller’s belief that all cash in the business belongs to them at closing. First-time sellers frequently say, “I’m going to take all of the cash out of the business.” They see the cash on the balance sheet and assume it is automatically excluded from the sale.

That is not how business sales work.

In a properly structured transaction, the business is sold with a normalized level of working capital. The purchase price assumes that the company will be delivered with sufficient liquidity to operate in the ordinary course immediately after closing.

What working capital really is

Working capital is not excess value sitting on top of the business. It is an operating asset of the business.

At a basic level, working capital includes current operating assets and liabilities that are required to run the company day to day. A material component of working capital in many businesses is inventory.

When a buyer acquires an e-commerce company, a distribution business, or a contractor with active jobs, the operating inventory is part of what is being purchased. The inventory is not a discretionary bonus to the buyer. It is an essential element of the operating platform the buyer is paying for.

The same principle applies to operating cash needed to fund payroll cycles, vendor payments, and receivable timing.

The valuation of the business already assumes that those operating assets remain in the business.

Why pulling cash breaks the deal

If a seller strips operating cash out of the business at closing without an agreed working capital adjustment, the buyer does not acquire a fully functioning business. The buyer acquires a business with an immediate liquidity deficit.

That deficit must be funded somehow.

In practical terms, that means the buyer must inject new equity or obtain additional financing immediately after closing simply to operate the company.

That is not how acquisition financing is intended to work. The working capital necessary to run the business is supposed to be delivered as part of the transaction.

Why lenders block thin working capital

Lenders focus on working capital because they understand that most post-closing failures are liquidity failures, not valuation errors.

A lender will not fund a transaction unless the company will have sufficient working capital at closing to operate in the ordinary course.

The underwriting question is straightforward: can the business fund payroll, inventory purchases, and receivable timing swings immediately after closing, without drawing on emergency credit and without impairing debt service?

If the answer is uncertain, the deal becomes structurally unfinanceable.

What goes wrong operationally

When a business is delivered with insufficient working capital, the operational consequences are immediate.

The company may be unable to meet payroll on ordinary cycles.

Inventory replenishment may be delayed or constrained.

Vendor terms may tighten.

Receivable timing mismatches become destabilizing.

Short-term borrowing becomes a necessity rather than a contingency.

Debt service becomes exposed to routine operating volatility.

From a lender’s perspective, these risks directly threaten the borrower’s ability to maintain required coverage and remain in compliance with loan covenants.

How deals handle it correctly

In properly structured Main Street and lower-middle-market transactions, working capital is addressed explicitly through a closing target.

The parties agree on a normalized working capital level based on historical operating needs. The purchase price is then adjusted dollar-for-dollar at closing if actual working capital delivered is above or below that target.

This mechanism is not designed to shift value between buyer and seller. It is designed to ensure that the buyer receives a business that can operate on day one without emergency financing.

Practical takeaway for sellers

If a seller removes operating cash from the business without replacing it through a working capital adjustment, the transaction will almost always encounter lender resistance.

From a lender’s perspective, insufficient working capital is not a negotiable business issue. It is a structural risk to loan performance.

Sellers should assume that a properly underwritten transaction will require the business to be delivered with enough working capital to fund normal operations immediately after closing. Any expectation to extract that liquidity must be addressed transparently through price and structure, not through depletion of operating assets.