What Is Working Capital? Does It Matter in a Small Business Sale?

A measure of a company's ability to cover its short-term obligations: current assets minus current liabilities.

Why it matters: Working capital is one of the clearest dividing lines between how small deals and larger deals get negotiated. M&A buyers on larger deals typically build a working capital target into the deal terms, often averaging 18 months of balance sheets to set it, with a price adjustment if the business is delivered above or below that target at closing. On smaller Main Street deals handled by business brokers, buyers usually skip this step entirely — so whether working capital comes up at all in a deal is itself a signal of transaction size and buyer sophistication. A seller moving from a smaller deal mindset into a larger one (or a buyer used to institutional deals looking at a Main Street business) should expect this to be one of the more unfamiliar parts of the negotiation.

Example: A $6M business sale includes a working capital target of $250,000 based on a trailing 18-month average. If the business has only $180,000 in working capital at closing, the purchase price gets reduced by the $70,000 shortfall — a mechanism a $1.5M deal would likely never invoke.

Current Assets vs. Current Liabilities

Current Assets	Current Liabilities
Cash and equivalents	Accounts payable
Inventory / stock	Wages payable
Accounts receivable	Current portion of debt/notes payable
Supplies	Accrued tax payable
Prepaid expenses	Dividends payable, customer deposits, unearned revenue

Related terms: Accounts Receivables, Balance Sheet, Multiple, Cash Flow Statement