staging-peachtree

How Working Capital Actually Gets Set in a Business Sale

Thu, 18 Jun 2026 19:40:54 GMT

How Working Capital Actually Gets Set in a Business Sale

A common instinct before a sale is to clean up the balance sheet. Collect the receivables, stretch the payables, run down inventory. It feels productive. It is not how this works.

I have written elsewhere that the price is not the proceeds. Working capital is one of the reasons why. It catches owners off guard, especially in seasonal businesses, and it is one of the biggest preventable surprises in what an owner takes home.

What Working Capital Means in a Sale

Most transactions transfer the business with what the parties agree is an appropriate level of working capital. Working capital is the receivables, inventory, prepaid expenses, and other current assets a business needs to operate, less the current obligations like accounts payable and accrued expenses. The convention you will hear is "cash-free, debt-free with a normalized level of working capital." Three pieces matter in that phrase.

Working capital excludes cash. You keep the cash. Working capital excludes debt. You retire the debt at closing. What transfers is what the business needs to keep running the day after you hand over the keys: enough inventory on the shelf, enough receivables in the pipeline, less the bills coming due.

The buyer is paying for a business that can keep running normally from day one, not one that requires an immediate cash infusion to keep the lights on.

Why It Looks Different in Every Business

The size and shape of that requirement depends on the business:

A B2B distributor on net-30 to net-60 terms carries significant receivables and warehouse inventory, often equal to several months of revenue at any given moment.
A consumer retailer with card-based payments and fast inventory turns runs mostly on cash, with much smaller working capital needs relative to revenue.
A government contractor may wait 30 to 60 days for payment, which inflates receivables on the balance sheet even for a healthy business.
A services business without product inventory is leaner still, with working capital concentrated in unbilled work and receivables.

There are also industries where inventory is carved out of working capital. Where inventory value is highly volatile, represents a large share of total business value, or requires specific appraisal, it is typically priced as a separate line item in the purchase agreement, at cost or by appraisal. Jewelry stores and car dealerships are the obvious examples. Treating that inventory inside a 12 to 24 month trailing average would distort the deal for both sides.

Fast-growing businesses also get a different treatment. A 12 to 24 month average will lag the current need, because a business growing 25 or 30 percent a year needs more working capital next quarter than it had this quarter. Two methods are common:

Shorten the trailing window, often to three or six months, so the peg reflects the current run rate rather than where the business was a year ago.
Express the peg as a percentage of trailing revenue, so the requirement scales with the top line as the business grows.

Either method results in a higher peg.

Working capital is not one number across businesses. Where your peg lands depends on the kind of business you run.

How Seasonality Changes the Math

For a seasonal business (e.g., building products, construction, certain manufacturing, agribusiness), working capital moves in a cycle, not a line. Inventory and receivables swell during the spring and summer selling season, then recede through fall and early winter before climbing again. The cycle repeats every year.

If the requirement were measured on the day of closing, the number would swing with the calendar. A business closing in June would look very different from the same business closing in December, even though nothing structural had changed. So it is not measured that way. The peg is set on an average of the trailing 12 to 24 months, which strips out the seasonal noise and gets at what the business needs to operate.

I have walked owners of seasonal businesses through this many times. It usually takes some explaining and a few questions back and forth. Most arrive at the same conclusion: the trailing average is fair to both sides, because it protects the owner from being penalized for closing in a trough as much as it protects the buyer from overpaying at a peak.

The Peg Is a Negotiation, Not a Formula

The peg is a negotiation, not a formula. Where the trailing window starts, how outlier months are treated, which line items count toward working capital and which sit outside it, all get negotiated in the broader context of the deal. A buyer with a sharp advisor will push for definitions that benefit them. An owner with a sharp advisor will push back.

Timing matters, sometimes as much as definitions. Setting the peg upfront, alongside the purchase price, while you still have alternatives and the buyer is competing for the deal, is one conversation. Letting it drift into confirmatory diligence, when the owner has fewer alternatives, is a very different one. Both sides know this. Sellers push to settle the peg early, when their leverage is at its highest. Buyers push to delay, often by pointing to their outside accountants still running confirmatory diligence on the financials. That is a legitimate process, but buyers use it to extend the timeline, because the leverage shifts toward them the longer the deal runs. Same number, different outcome.

This is why preparation matters. A Quality of Earnings analysis done before going to market does several things at once:

It independently verifies the quality of the reported earnings.
It surfaces normalizing adjustments and one-time items.
It identifies the working capital trend and frames the appropriate trailing window.
It gives the owner the analytic foundation to negotiate the peg early, when leverage is at its highest, rather than reacting to it later.

The buyer's accountants are going to do their own confirmatory work on the numbers either way. Lead with your working capital analysis, or defend against someone else's.

The trailing average also does something useful for both sides: it resists short-term gaming. Running receivables down, stretching payables, or drawing down inventory in the weeks before closing does not meaningfully move a 12 to 24 month trailing average. A month or two of distortion gets diluted across the broader cycle.

Why Late Cleanup Fails

Buyers also notice. A balance sheet that shifts noticeably in the months before closing is obvious to a sophisticated buyer. The math may not move, but trust does.

The peg is not a snapshot of closing day. It is an average of what the business has needed to operate over a real cycle. The closing-day delivery is then measured against that peg.

That keeps both sides honest. The buyer cannot demand an unrealistic level of working capital. The owner cannot strip the business in the weeks before closing without consequence. The reference point is fixed, and it is fair.

A Concrete Example

Picture a business with a working capital peg of $1 million. At closing, the actual working capital on the balance sheet is $800,000. The buyer adjusts the closing wire down by the $200,000 shortfall, the gap they have to fund to keep the business running. That is not a price renegotiation. It is a mechanical adjustment built into the purchase agreement, applied at closing.

The math runs the other direction too. Deliver $1.2 million against the same peg, and the wire moves up by $200,000 in the owner's favor. The mechanism is symmetric. Neither direction is a windfall. Whichever way the adjustment runs, it is a transfer of working capital that someone has to fund.

The Real Lever Is How You Run the Business

Here is what actually moves the number. You cannot trick the working capital requirement, but you can lower it honestly. A business that collects faster, turns inventory more efficiently, and manages its terms with discipline needs less working capital to run.

That is real money. Not at the closing table, where the lower peg means a lower amount transferred, but every month you own the business. Less cash and credit tied up in receivables and inventory means more available for distributions, debt paydown, growth investment, or weathering a slow quarter without drawing on a line of credit. That value compounds quietly across years of ownership.

There is a second benefit that belongs in the positioning story. A business that demonstrates disciplined working capital management tells a better story to a buyer. It signals quality in the people, processes, and systems that will endure after the transaction. That kind of signal tends to support better terms, broader interest, and a stronger negotiating position when the time to sell does come.

It is not a maneuver you execute in the last 90 days. It is a way of running the business that compounds over years.

Working capital is not something you clean up before a sale. It is a discipline you build long before one.

Honest valuation. Disciplined process. Confidential execution.

Do You Own a Business or Are You the Business?

Tue, 19 May 2026 19:51:15 GMT

Do You Own a Business or Are You the Business?

Buyers are buying what you built. The question is whether it runs without you.

Take a real week off. Limit the calls. Skip the daily check-ins. See what comes through anyway.

Does the business still run?

If the honest answer is yes, you own a business. If the answer is no, you are the business. The distinction matters more than most owners realize until they sit down with a serious buyer.

Missed add-backs cost owners dollars. Owner dependency costs them deals.

What the Buyer Is Buying

A buyer is not buying your past. They are buying the future cash flows the business will generate after you are gone.

That means every relationship, every decision, and every revenue stream that runs through you personally is a risk factor for the buyer. The buyer's diligence team is going to find it. The buyer's lender is going to ask about it. The price is going to come down. In some cases, the buyer will walk.

Across two decades executing M&A transactions, every closed deal I worked on involved an in-depth conversation about the management team. For founder-led and owner-led businesses, "How's the team?" was foundational. What that meant was "How's the team without the owner?" I have seen buyers walk away from otherwise attractive businesses when they did not have confidence in the leadership immediately below the owner.

The diligence questions are predictable. Honest answers tell you where you stand.

Customer relationships. Do the top customers buy from the business, or from you personally? If a customer signs renewals because they trust the company, that is enterprise value. If they sign because they have your cell number on speed dial, that is personal goodwill. The buyer cannot acquire personal goodwill. The more concentrated the book, the deeper the discount.

Supplier and vendor relationships. Same test. If pricing, terms, or priority allocation are tied to a handshake relationship with the owner, the buyer is going to assume some of that walks out the door at close.

Sales and origination. Are you the rainmaker? If new business comes through your relationships, your reputation, and your selling, you are the engine, not the business. The pipeline ends where you do. That cannot be transacted.

People, processes, and systems. When something significant comes up, does the team handle it inside an established process, or does it land on your desk? A buyer evaluates the people, the processes, and the systems together. The team may be capable. The systems may already exist. Finding out requires you to consciously step back and watch what happens. If real decisions still route through you, you are the business regardless of what the org chart says.

How Buyers Evaluate the Team

The buyer will form their own view on the team. Whether they take over personally or install new leadership, they still need a team underneath that can deliver. The pattern I have seen in this evaluation is consistent across deals.

The buyer is evaluating two sides of each key leader. The business side: does this leader have command of their area and consistently deliver against plan? The people side: have they built, developed, and retained the team around them? One without the other is a single point of failure.

The buyer then applies the same diagnostic from earlier in this article to each leader. Is the customer relationship sitting with someone on your team, or with you? Is new business coming through your sales lead, or through you? Are operations running on systems your team executes, or are you still the system?

The form of the evaluation varies with deal size. Larger and more institutional buyers run structured management assessments. Smaller buyers do the same evaluation in less formal conversations. The form changes. The substance does not.

I have watched this play out across many deals. Where the team holds up, the price holds. Where it does not, the buyer retrades or walks.

What to Do About It

The work is not complicated. It is uncomfortable, and it takes time. Three things.

First, evaluate the team objectively. Take the week off. Watch how often the phone rings. Look at the decisions that pile up waiting for your return. Talk to your second-level leaders about what they were able to handle and what they could not. The vacation is both a test and the break you have earned.

Second, invest in the team. This sometimes means training the people you have. It sometimes means hiring leaders from outside. Both come with real cost. The cost of leaving the dependency in place is always higher, and it shows up at the closing table.

Third, give it time. Last-minute changes to people, processes, or systems do not solve the dependency problem. The buyer wants to see people, processes, and systems that have been in place long enough to demonstrate the business can run without you. If your sale horizon is twelve to twenty-four months, the work needs to be underway now.

The Point

Owner dependency is not a moral failing. It is the natural result of having built something with your skills, your relationships, and your work ethic. That is how most businesses get from zero to where they are.

The buyer is buying what you built. The price reflects what keeps running without you. Anything that does not gets discounted, retraded, or walked away from.

The lesson is not that you have to be removable from your business today. The lesson is that buyers expect a transition, and the work is to demonstrate the business will navigate it, keep its customers, and continue to perform.

Honest valuation. Disciplined process. Confidential execution.

Before You Decide to Sell Your Business, Answer These Three Questions

Tue, 14 Apr 2026 19:20:08 GMT

Before You Decide to Sell Your Business, Answer These Three Questions

Selling a business is one of the most significant financial decisions you will ever make. Here is where to start.

At some point, almost every business owner starts thinking about an exit. The catalyst is different for everyone:

Maybe years of building something great have you thinking about retirement and what the next chapter looks like.
Maybe it is a serious conversation with a spouse or a financial planner.
Maybe it is a passing thought after a hard quarter.
Maybe someone has already reached out expressing interest in acquiring your business and you are not sure what to make of it.

Whenever that moment arrives, it tends to bring one question to the surface: Is now the right time?

The honest answer requires working through three separate questions, not one. The first two drive your valuation. The third determines whether acting on that valuation is the right decision for you. Owners who work through all three reach that decision with clarity, and when the time is right, they move forward with conviction.

These three questions form the foundation of every conversation I have with a business owner thinking about a sale. They are the product of two decades spent advising entrepreneurs and business owners through transactions that shaped the next chapters of their lives. Work through all three honestly, and you will be better prepared than most.

Question 1: Is the Market Ready?

External conditions shape what your business is worth.

External conditions matter, and they are not just noise. Macroeconomic shifts and cycles, geopolitical conflicts, global health disruptions, shifting trade policy: all of it defines the market backdrop for a potential transaction. These conditions have real valuation consequences. Higher interest rates tighten financing and compress what buyers can pay. You need to understand how the current market environment is shaping conditions for businesses like yours.

These conditions can change quickly, often without warning. The macroeconomic environment that looks one way today can look very different in three or six months. That is why your best strategy is to focus on the things you control. Your advisor should incorporate current market dynamics into your valuation analysis so your valuation reflects today's market realities and can be recalibrated as conditions change. Your energy is best directed toward building the kind of business and sale readiness that lets you move decisively when you decide the time is right.

That starts with asking the right question. Not what the market is doing, but whether the broader environment is showing up in your business. The same macroeconomic shift can be a tailwind in one industry and a headwind in another. Headlines give you context. The signals inside your business, from pipeline and orders to customer and supplier behavior, tell you the truth, often before the financials reflect it.

I saw this play out firsthand when COVID hit in early 2020. I was working with two business owners simultaneously, one in residential services, one in logistics. We had the first business actively in market when the pandemic hit and made the decision to pause the process. Five months later we relaunched, and the business sold quickly at a valuation that exceeded our pre-COVID expectations. Homeowners were investing in their properties, demand had accelerated, and buyers recognized it. The logistics business was a different story. Its end market was hit hard by COVID, and that business did not go to market for nearly two years. When it did, the owner achieved a strong outcome, but the timeline was dramatically extended by forces entirely outside their control. Same advisor, same moment in history, two completely different paths. That is not an anomaly. It is how markets work.

You cannot control the market. You can control how prepared your business is when conditions align. That preparation is what lets you move with confidence when the window opens.

Question 2: Is Your Business Ready?

The numbers tell buyers what happened. Your job is to explain why.

Financial statements and tax returns tell you what happened. They document the numbers. But buyers do not just want to know what happened. They want to know why. Why did revenue grow? Was it because of deliberate decisions you made, or favorable market conditions that may not continue? Why did margins expand or contract? Is it structural, or temporary?

Context matters here. Margins contracting because you are investing in people, processes, and systems to support anticipated growth can reinforce your positioning story. It signals intentional leadership and forward momentum.

On the other hand, margins that look strong on the surface because the business has outgrown its people, processes, and systems will be normalized by a sophisticated buyer in their analysis. The why is not just important. It is what separates a credible seller from a vulnerable one.

The why behind your numbers is the story you will tell from the first conversation with a buyer all the way through due diligence and closing. That story needs to be consistent, credible, and defensible at every stage. A story that holds up early but starts to unravel under buyer scrutiny is not a story. It is a liability.

A buyer's job is to be skeptical. They are going to kick the tires, look under the hood, and ask hard questions. Your job as the seller is to be ready for that, and that readiness is built in advance, with your advisor, not improvised in the middle of a transaction. Tools like a quality of earnings (QoE) analysis exist precisely to help you nail down the why before a buyer asks the questions.

No one understands your business better than you do. What I bring is the outside perspective, the analytical rigor, and the buyer-side experience to pair with that knowledge and get to the most credible version of your story.

All of this should be happening within a disciplined, confidential process, and with the right advisor, it does. A breach at the wrong moment can distract your workforce, unsettle customer and supplier relationships, and surface competitive intelligence you cannot take back. Protecting against that at every stage is a core part of what the right advisor does.

Business readiness also means looking beyond the numbers:

How owner-dependent is your business?
Are key customer relationships or critical operational knowledge concentrated in a way that creates risk for a buyer?
How clean are your books?

These are questions worth addressing before buyers start asking them.

The story you tell on day one needs to be the same story you are telling at closing. That story is built before the process starts, with preparation, the right tools, and the right advisor.

The first two questions prepare you for the transaction. The third one determines how you show up in it, and what you do when it is over.

Question 3: Are You Ready Personally?

The most overlooked question, and the one most likely to surface at the moments when you most need clarity.

This is the question that gets skipped most often, and it is the one most likely to catch an owner off guard, whether in the middle of a transaction or in the quiet that follows one.

Selling a business you have built and run for ten, twenty, or thirty-plus years is a significant life transition. Even a transaction that meets or exceeds every financial target can leave an owner feeling unmoored if they were not fully prepared for what comes next.

This dimension of personal readiness is harder to quantify. Your business has likely been a defining part of how you spend your time, measure your progress, and see yourself professionally. Are you prepared for life without that anchor? Not everyone has fully thought through that question, and that is okay. But it is worth considering before the process starts, because a decision you have not fully made in your own mind has a way of surfacing at the moments when you most need clarity.

The more concrete dimension is financial clarity, and it has two parts that need to be worked through together.

The first is understanding what your business is worth. An honest valuation is not a number you arrive at by instinct. It is a disciplined assessment of your financial performance, your market position, and current deal conditions. That work is what I do.

The second part is understanding what that number means for your life. Your financial advisors, CPA, and/or attorney can help you understand what a transaction produces on an after-tax, after-fees basis and what that means in practical terms. Does it fund the retirement you are planning, or a portion thereof? Does it create the runway for your next venture?

For some owners, the number exceeds what they need and the decision becomes straightforward.

For others, a gap exists between what the business is worth and what they need from a transaction, and that gap needs to be resolved honestly before going to market.

Either way, that reconciliation belongs before the process starts, not in the middle of it. A seller working through that question during active negotiations, with a buyer engaged and under time pressure, is at a significant disadvantage. Do that work first.

The personal and family dimensions of this question sit outside the scope of any deal advisor. That work happens in conversations with the people closest to you, and it is worth having those conversations before the process starts.

Knowing your number does not move the market. But it gives you a clear standard against which every offer, every counteroffer, and every term can be measured.

Why All Three Questions Matter

When the market is ready, the business is prepared, and the seller has the personal clarity to act decisively and navigate the process with confidence, the result is a process that attracts motivated buyers. And motivated buyers, engaged through a disciplined process, are where real negotiating leverage comes from.

These questions hold true regardless of the size of your business or the industry you are in. The numbers and the business model will differ. The principles do not.

The three questions are not independent. They reinforce each other. The owners who get the best outcomes are the ones who worked through all three before the process started.

Every one of these questions looks different when it is applied to your business, your market, and your life. That is the conversation I am here to have. That decision is yours to make. My job is to make sure you make it with full information, honest counsel, and a clear-eyed view of your options.

Honest valuation. Disciplined process. Confidential execution.