Asset Sale or Stock Sale: When Working Capital Costs You Money (and When It Doesn't)

You've agreed on a price. Then the buyer's attorney sends over a draft LOI that mentions "working capital," and you're not sure whether that line is going to cost you money.

The honest answer: it depends almost entirely on how your deal is structured. For many owners selling a $1M to $10M revenue business in Greater Boston, working capital barely touches the purchase price. For others, it can move net proceeds by tens of thousands of dollars. Here's how to tell which situation you're in.

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What working capital actually means

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Working capital is current assets minus current liabilities. Cash, accounts receivable, and inventory on one side. Accounts payable, accrued expenses, and other short-term obligations on the other.

In a sale, the real question isn't how much working capital the business has. It's who keeps it at closing. That comes down to whether you're selling assets or selling the company itself.

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Asset Sales:  you usually keep it.

Most sales in this size range, especially SBA-financed deals, are asset sales. The buyer purchases the equipment, vehicles, customer relationships, brand, and goodwill, and usually the inventory. In a typical asset sale, the seller:

• Keeps the cash in the bank
• Collects their own outstanding receivables
• Pays off their own payables and debt, usually out of proceeds at closing

Because working capital doesn't transfer, there's usually no working capital target and no post-closing true-up. The buyer funds their own Day One operating cash, often through a working capital component built into their SBA loan.

If someone tells you that you need to "leave working capital in the business" in a standard asset deal, ask exactly what they mean. It may be one buyer's request, not a market norm.

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Where it still costs sellers money in an asset sale

Even without a working capital target, a few line items get settled at closing. These are where asset-deal sellers actually lose proceeds.

Inventory. It's usually counted at closing and either paid for on top of the price or included at an agreed level with an adjustment. Obsolete or slow-moving stock gets discounted or excluded. If the price assumes a certain inventory level and the count comes in short, expect the difference to come off.

Customer deposits and prepaid work. If you've already collected for work the buyer will perform, such as annual maintenance agreements, service contracts, or job deposits, the buyer will expect a credit at closing. For HVAC, refrigeration, and other service businesses with recurring contracts, this can be a meaningful number.

Work in progress. For half-finished jobs, someone has to decide who bills the customer and who covers the labor and materials. Agree on a cutoff method well before closing day.

Accrued employee benefits. Earned vacation or PTO that the buyer agrees to honor typically shows up as a credit to the buyer.

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Stock sales and larger buyers: the working capital peg

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Things change when the buyer purchases your stock or membership interests. They also change when a larger private equity or strategic buyer structures an asset deal that takes over your receivables and payables. In those deals, the business comes with its working capital, and the purchase price assumes a normal level of it.

That's where the working capital peg comes in:

1. You and the buyer agree on a target, usually based on a trailing 12-month average.
2. Actual working capital is measured at closing.
3. If it's above the target, the buyer pays you the difference. If it's below, you pay the buyer, often out of an escrow holdback.

For example, a $3M revenue service business might average $420K in current assets and $280K in current liabilities, for a target of roughly $140K. Many deals also include a collar, a small range such as plus or minus $15K where no adjustment happens.

Cash is usually excluded. These deals are typically "cash-free, debt-free," meaning you keep the cash and pay off the debt. But that has to be spelled out in writing.

Where sellers get tripped up in peg deals:

• Seasonality. A 12-month average can hide big swings in landscaping, HVAC, or event businesses. Closing in a slow month can leave you short of the target.
• Pre-closing changes. Pulling extra distributions, chasing receivables hard, or stretching payables right before closing shows up in the true-up.
• Vague definitions. Prepaid expenses, related-party receivables, and tax liabilities all need to be clearly in or out.

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What to do now if you're 1 to 3 years out

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• Know your likely deal structure early. Is your buyer pool mostly individuals using SBA financing, or private equity and strategic acquirers? That largely decides whether a peg is in play.
• Clean up your inventory records. Know what you have, what it cost, and what's actually sellable.
• Track deposits and prepaid contracts separately. If you sell service agreements or take job deposits, your books should show exactly what's been collected for work not yet done.
• Have a work-in-progress cutoff method. Decide how partially completed jobs will be split before it becomes a closing-day argument.
• If a peg is likely, track working capital monthly. A clean trailing history makes it harder for a buyer to pick an unfavorable measurement period.
• Don't change how you operate. Big shifts in collections, vendor payments, or inventory in the year before a sale get noticed and erode trust.
• Settle definitions in the LOI. It's much easier to agree on what's included before you sign than to fight about it in the purchase agreement.

As always, bring your CPA and attorney in early. Deal structure has tax consequences that go well beyond working capital.

The bottom line

In a typical asset sale, working capital is mostly yours to keep, and the money is in the details: inventory counts, customer deposits, and open jobs. In a stock sale or a deal with a larger buyer, the working capital peg can move your proceeds up or down, and preparation is what protects you.

Either way, the owners who come out ahead understand their deal structure before the LOI arrives.

That's what we do at Nova Exit Partners. Erik Kretschmar has founded and sold four businesses of his own and now helps owners across Greater Boston and New England prepare for and run their exits. If you're thinking about selling in the next few years, start with a free Broker's Opinion of Value. There's no cost and no obligation to list

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