4. Why Working Capital Adjustments Kill Deals

business brokers manage the sales process methodically and professionally

helping sellers understand the hidden deal-killer lurking in the fine print

Here’s a scenario that happens far too often -

A seller agrees to a great price. Due diligence is going well.

Then the accountant says - “We’ve calculated a $120,000 working capital adjustment so the final amount you’ll receive is $1.08 million, not $1.2 million.”

 The seller feels blindsided. The broker scrambles to smooth things over and the buyer starts wondering if the seller really understands the numbers at all.

💡 What Working Capital Actually Is

Put simply -

Working capital is the money needed to keep the business running smoothly the day after the sale.

 It includes -

• Accounts receivable

• Inventory

• Accounts payable (in reverse)

• Other current assets or liabilities

 When buyers purchase a business, they expect to receive enough working capital to operate it without an immediate cash injection.

📉 Why It Causes So Much Confusion

Sellers often assume they’re selling “just the business” and that everything else (cash, receivables, payables) is extra.

But most deals are priced on a debt-free, cash-free basis, but with a normal level of working capital included.

So, when the adjustment comes in, it feels like a last-minute discount, even though it was baked into the valuation all along.

🧠 How to Explain It to Your Clients

Here’s how to keep it simple:

• “Imagine you’re buying a car. You expect there to be petrol in the tank.”
  Working capital is that petrol. Without it, the buyer can’t drive away.

• “You’re selling a going concern, not a stripped shell.”
  The buyer expects to be able to operate the business from day one, not immediately put in more money.

• “Working capital keeps the lights on. It’s not extra - it’s included.”
  Sellers often think receivables or inventory are a bonus. But they’re part of what the buyer is already paying for.

🛠 Broker Questions to Ask Sellers Early

Avoid deal friction by bringing this up before lawyers and accountants do -

• “Do you know how much working capital your business needs to function day-to-day?”

• “Has your accountant helped you understand how much you’ll actually walk away with?”

• “Are your financials structured in a way that shows a clear working capital picture?”

🚨 Common Pitfalls to Watch For

• Sellers assuming they keep all receivables
  (Even if the buyer is taking over the liabilities)

• Sellers confusing cash and working capital
  (Cash is removed. Working capital usually stays)

• Sellers thinking working capital is “negotiable” at the last minute
  (It’s usually benchmarked and baked into the price from the beginning)

🤝 Final Thought

Working capital isn’t just an accounting exercise - it’s a trust exercise.

When you help sellers understand it early, they stay calm and confident later. When they find out late, they feel burned and the whole deal can unravel.

If you’re managing a deal right now where this is getting messy, I’m happy to step in as a sounding board.

👉 Book a free 15-min strategy call https://www.regenerationhq.co.nz/contact
👉 Or reply to john.luxton@regenerationhq.co.nz and I’ll send through hrough some support.