Why I Always Verify Working Capital Needs Before Closing a Deal

When I first started buying businesses, I focused on purchase price, financing terms, and profitability. I thought if the price was fair and the cash flow looked good, the deal would work. What I didn’t realize at the time was that even the most profitable businesses can run into trouble if they don’t have the right amount of working capital.

Working capital is the lifeblood of day-to-day operations. It’s what allows a company to pay employees, keep vendors happy, and manage cash flow fluctuations. If I underestimate working capital needs, I can step into ownership only to discover that the business is starved for cash. That’s a nightmare scenario and one I’ve learned to avoid through hard lessons.

In this article, I’ll explain why I always verify working capital needs before closing a deal, how I calculate them, and the mistakes I’ve made when I didn’t take them seriously enough.

Why Working Capital Matters

Working capital is the difference between current assets (cash, receivables, inventory) and current liabilities (payables, short-term debt, accrued expenses). In plain terms, it’s the cash cushion that keeps the business running smoothly.

A company can look profitable on paper but still struggle if cash is tied up in receivables or slow-moving inventory. Without enough working capital, bills pile up, vendors lose trust, and employees feel insecure.

That’s why verifying working capital isn’t just financial housekeeping, it’s a survival check.

My First Hard Lesson

In one of my early acquisitions, I didn’t dig deeply into working capital. The business looked great strong margins, loyal customers, consistent revenue. But right after closing, I realized receivables took 60 days to collect, while payables were due in 30. Suddenly, I was covering a cash gap every month just to keep the lights on.

The business was profitable, but I hadn’t accounted for the working capital it required. That mistake forced me to inject extra capital post-close capital I hadn’t budgeted for. It was a painful but valuable lesson.

How I Evaluate Working Capital

Today, I take working capital seriously. When I review a business, I focus on several areas:

1. Receivables

How long does it take customers to pay invoices? Are there consistent late payments? A business with slow collections ties up cash that I’ll need to fund operations.

2. Payables

What are the payment terms with vendors? If the business pays vendors faster than it collects from customers, I know cash gaps will appear.

3. Inventory

How much capital is tied up in inventory? Is it fast-moving or slow-moving? Excess inventory can strangle cash flow.

4. Seasonality

Does the business require more working capital at certain times of the year? Seasonal businesses need extra planning to handle fluctuations.

5. Historical Trends

I look at historical working capital needs over 12–24 months. Has the business required injections of cash? Has it been running lean or carrying a healthy buffer?

The Importance of Normalized Working Capital

One of the key lessons I’ve learned is to focus on normalized working capital, the level the business truly needs to operate smoothly. Sellers sometimes strip working capital out before closing, leaving the buyer underfunded.

That’s why I negotiate a working capital target as part of the purchase agreement. If the seller delivers less than the target at closing, the purchase price is adjusted.

Mistakes I’ve Made

I’ve made mistakes by trusting seller assurances like “we’ve always been fine with cash flow.” In reality, the seller had been injecting personal funds during tight months, something I didn’t realize until later.

I’ve also underestimated the impact of growth on working capital. Growing businesses often need more capital to fund receivables and inventory. Without planning for that, growth can create strain instead of opportunity.

How I Protect Myself

To avoid surprises, I protect myself by:

• Analyzing historical working capital levels and setting a target in the purchase agreement.
• Negotiating a true-up mechanism so adjustments are made if working capital is below target at closing.
• Modeling cash flow scenarios to ensure debt payments and operating needs can be covered.
• Securing extra liquidity beyond the purchase price in case of fluctuations.

These steps give me confidence that I won’t be blindsided after closing.

Why Banks and Lenders Care

Lenders scrutinize working capital for the same reason I do. If the business can’t cover its short-term obligations, debt repayment becomes risky. Banks often require buyers to maintain certain working capital levels as a condition of financing.

That’s another reason I verify working capital carefully; if I don’t, I could end up breaching loan covenants unintentionally.

Working Capital as a Strategic Tool

Beyond avoiding risk, I also see working capital as a strategic lever. Businesses that manage working capital efficiently often free up cash that can be reinvested into growth.

I look for opportunities to:

• Improve collections on receivables.
• Negotiate better vendor terms.
• Optimize inventory turnover.

These improvements create real value without needing new customers or revenue.

Final Thoughts

Working capital may not be glamorous, but it’s one of the most important factors in whether an acquisition succeeds. I’ve learned to respect it, analyze it, and negotiate for it just as carefully as I do the purchase price.

By verifying working capital needs before closing, I protect myself from hidden risks and set the business up for stability from day one.

Because in the end, profitability on paper doesn’t keep the lights on, cash does. And cash comes from smart working capital management.

I continue sharing my acquisition frameworks and lessons at DrConnorRobertson.com, where I document the details that make or break deals in real life.