Working Capital

Working capital is the net amount of short-term assets available to fund the day-to-day operations of a business, calculated as current assets minus current liabilities. In business sale transactions, working capital is critically important because the buyer typically needs sufficient working capital to operate the business from the day they take ownership.

In most Canadian business sale transactions, the purchase price assumes that the seller will deliver the business with a "normal" level of working capital — a target amount negotiated and defined in the purchase agreement. If actual working capital at closing is higher than the target, the buyer pays more (a positive adjustment); if it is lower, the seller receives less (a negative adjustment). This mechanism prevents the seller from stripping cash or receivables from the business before closing.

Working capital disputes are among the most common post-closing disagreements in Canadian M&A. Buyers and their CPAs should model the business's historical working capital carefully during due diligence to establish an appropriate target and understand seasonal fluctuations.

See also: Due Diligence, Purchase Agreement, Closing, Quality of Earnings.