Working capital is the money tied up in running the business day to day. In a business sale, it can affect the purchase price, trigger completion adjustments, and determine whether the buyer has enough cash to keep trading after the deal completes.
Quick Answer: What is working capital in a business sale?
Working capital is the short-term financial resource a business needs to operate normally — typically the net of current assets (stock, debtors, cash) minus current liabilities (creditors, accruals, customer prepayments). In simple terms, it is the money tied up in the day-to-day cycle of buying, producing, selling and being paid.
In a business sale, working capital matters because a buyer who spends all their available funds on the purchase price — leaving nothing for wages, rent, stock, suppliers, VAT or other immediate costs — may find the business in financial difficulty within days of completion. Even a highly profitable business requires cash to operate, and the timing mismatch between paying costs and receiving income creates a constant working capital need.
Working capital can be included in the purchase price, excluded and left with the seller, adjusted at completion through a price mechanism, or negotiated as a separate element of the deal. The treatment depends on whether the sale is structured as an asset purchase or a share purchase, the nature of the business, and what the parties agree in heads of terms and the sale agreement.
Both buyers and sellers should reach a clear, documented agreement on working capital before the deal progresses — ideally at the heads of terms stage.
Contents
What does working capital include?
The technical definition of working capital is current assets minus current liabilities. In the context of a business sale, the specific items that fall within "working capital" depend on what the parties have agreed — which is why a clear, documented definition is essential.
Items that are commonly included in working capital:
Current assets:
Stock (raw materials, work-in-progress, finished goods)
Trade debtors — money owed by customers
Prepayments — costs paid in advance (insurance premiums, rent deposits, software licences)
Cash and bank balances (depending on whether the deal is cash-free)
Current liabilities:
Trade creditors — money owed to suppliers
Accrued expenses — costs incurred but not yet invoiced
Customer prepayments and deposits — money received for goods or services not yet delivered
Gift vouchers outstanding
VAT balance due (or receivable)
PAYE and NI due to HMRC
Payroll accruals
The difference — current assets minus current liabilities — is the net working capital position. A business with £120,000 in current assets and £80,000 in current liabilities has net working capital of £40,000.
Working capital is not the same as long-term assets (equipment, property, goodwill), long-term liabilities (bank loans, hire purchase) or the headline purchase price. It is specifically about the short-term financial cycle of the operating business.
Because the definition of working capital can vary significantly depending on what items are included or excluded, the parties must agree and document it explicitly in the sale agreement. Disputes over working capital are disproportionately common in business sales — almost always because the definition was left vague at the heads of terms stage.
Why working capital matters to buyers
The most important practical implication of working capital for buyers is this: completing a business purchase does not just require the funds to pay the seller. It also requires enough cash to continue running the business from day one.
After completion, a new owner typically faces immediate costs:
Staff wages — often due within days or weeks of taking over
Rent — if the next rent payment falls shortly after completion
Supplier payments — creditors who were already owed money before completion
Stock purchases — replenishing stock that was used up around the time of completion
Utilities and insurance — ongoing overhead costs that do not pause for a change of ownership
VAT — a VAT return may be due in the first weeks, requiring a cash payment to HMRC
PAYE — employer obligations for the first payroll period after completion
Loan repayments — if the business carries any finance obligations that transfer
Customer refunds or service obligations — particularly if the business has customer deposits or gift vouchers outstanding
A buyer who commits every available pound to the purchase price and retains nothing for working capital is taking a very significant risk. Even if the business is profitable in the medium term, the cash flow cycle in the days and weeks after completion can be extremely demanding.
The size of the working capital requirement varies enormously by sector. A business that collects cash at point of sale — a retail shop, a café — has a very different working capital profile from a B2B service business that invoices clients on 30-day terms, or a manufacturing business that buys materials, converts them and then waits for payment from distributors. Understanding the specific working capital cycle of the business you are buying is an essential part of financial planning.
A common rule of thumb is to retain at least one to three months' worth of operating costs as a working capital reserve after completion, over and above the purchase price. For cash-hungry businesses in sectors like construction, wholesale or care services, this figure may need to be considerably higher.
Why working capital matters to sellers
Working capital is equally important from the seller's perspective — but for different reasons.
The seller's concern is to understand clearly what they are being asked to leave in the business at completion, and whether the agreed purchase price reflects that.
Without a clear working capital definition, a seller may not know:
Whether they are expected to leave cash in the business's bank account at completion
Whether historical debtors (money owed to the business before the sale) belong to them or transfer to the buyer
Whether they can collect outstanding invoices after completion or must hand these over
Whether they are responsible for paying creditors that existed before completion
Whether customer deposits, gift vouchers or prepayments are factored into the price or represent an obligation they carry into the sale
Whether stock is included in the headline price or valued and paid for separately
A seller who expects to walk away with a clean cash payment may be surprised to find — late in the process — that the buyer expects the business to be handed over with a certain level of working capital in place. Equally, a seller who has run down stock or drawn out cash in the months before completion may face a price adjustment under a completion accounts mechanism.
These issues should be negotiated and documented at the heads of terms stage, not left to be resolved in the sale agreement after professional costs have been incurred.
Asset sale vs share sale working capital
The way working capital is treated in a business sale depends significantly on whether the transaction is structured as an asset purchase or a share purchase.
Asset sale
In an asset purchase, the buyer acquires specific assets and liabilities from the seller — typically the trading name, equipment, goodwill, customer contracts, and often stock and certain other working capital items. The company itself remains with the seller.
Working capital treatment in an asset sale is usually negotiated item by item:
Stockis typically included in the sale and valued separately — either at a fixed agreed amount or through a completion stocktake
Trade debtorsare usually retained by the seller — the seller collects the money owed by customers at the time of sale
Trade creditorsusually remain with the seller — the seller pays the outstanding amounts owed to suppliers
Cashis usually retained by the seller
Customer deposits and gift vouchersneed to be agreed specifically — these represent obligations to deliver future goods or services and the buyer may need to inherit the liability
Everything should be explicitly itemised. An asset sale that leaves working capital treatment undefined is an invitation to dispute.
Share sale
In a share purchase, the buyer acquires the company itself. The company retains all of its assets and liabilities — including cash, debtors, stock, creditors and all other balance sheet items — unless the agreement specifically adjusts for them.
This means the working capital position at completion is automatically the buyer's responsibility — which can be a significant advantage or disadvantage depending on how the business has been managed in the run-up to the sale.
Share sale agreements commonly use one of two mechanisms to manage working capital:
Completion accounts:The purchase price is adjusted after completion based on the actual balance sheet at the completion date. The difference between the actual working capital and the agreed "target" or "normal" working capital level is reflected in a price adjustment paid by one party to the other.
Locked box:The price is fixed by reference to a historic balance sheet (the "locked box" date), and the seller agrees not to extract value from the business between that date and completion. This avoids the need for post-completion accounts but requires the locked box balance sheet to be accurate and agreed.
Both approaches require specialist accounting and legal input. The definitions of what counts as working capital, what counts as net debt, and what constitutes a "permitted payment" or "leakage" between the locked box date and completion are all technically complex and need to be drafted carefully.
What is normal working capital?
One of the most important concepts in share sale working capital mechanics is "normal" or "normalised" working capital. This is the level of working capital that the business typically needs to operate in the ordinary course — its average day-to-day position, excluding unusual peaks or troughs.
The purpose of a normal working capital target is to protect the buyer from receiving a business that has been stripped of working capital in the run-up to completion — and to protect the seller from being required to leave an unusually high level of cash or stock in the business at their own cost.
Normal working capital is usually calculated by taking a historical average — typically the average monthly working capital balance over the last twelve months. This smooths out seasonal variation and gives both parties a defensible baseline.
Example
January - £55,000
February - £58,000
March - £52,000
April - £60,000
May - £57,000
June - £54,000
July - £61,000
August - £59,000
September - £53,000
October - £58,000
November - £56,000
December - £62,000
12-month average-£57,100
If the parties agree a normal working capital target of £57,000 and the actual working capital at completion is £42,000, the seller may owe the buyer a completion adjustment of £15,000 — because the business is being handed over with less working capital than agreed.
If actual working capital at completion is £70,000, the buyer may owe the seller an additional payment of £13,000, because the business is being handed over with more than the agreed normal level.
In practice, calculating and agreeing the normal working capital target is a technical accounting exercise that requires both parties' accountants to work through the historical data together. It is not something that can be determined accurately by reference to the balance sheet alone.
How completion adjustments work
A completion adjustment is a mechanism for adjusting the purchase price after completion based on actual financial data. It is most common in share purchases but can also appear in more complex asset sales.
Simple example
The parties agree:
Purchase price: £500,000
Agreed target working capital: £100,000 (to be left in the business at completion)
Actual working capital at completion: £82,000
Because the business was handed over with less working capital than agreed, the buyer has to fund the shortfall from their own resources. The sale agreement provides for a reduction in the purchase price:
Purchase price adjusted downwards by: £18,000
Adjusted purchase price paid: £482,000
Conversely, if actual working capital at completion is £118,000, the buyer may be required to make an additional payment of £18,000 to the seller.
The mechanics are more nuanced than this simplified example suggests. The agreement must specify the definitions used, who prepares the completion accounts, the timeline for preparation and review, how disputes are resolved, and what happens if both sides cannot agree the figures. These provisions need to be drafted by a solicitor with experience in business acquisitions.
Locked box vs completion accounts
In a share sale, the two most common approaches to price certainty are:
Completion accounts:The price is adjusted after completion based on actual figures at the completion date. This gives the buyer certainty about what they are paying for — but creates a period of uncertainty after completion while the accounts are prepared and agreed.
Locked box:The price is fixed at the time of signing, by reference to a historic balance sheet at an agreed reference date. The seller agrees not to extract value from the business between the locked box date and completion — any such extraction ("leakage") can be clawed back. This gives both parties price certainty from the point of signing but requires confidence in the accuracy of the locked box accounts.
Each approach has advantages and risks, and the choice depends on the size and complexity of the transaction, the quality of the company's financial records, and the relative negotiating positions of the parties.
Examples by business type
Working capital needs and the specific items that matter vary significantly by sector. Here are some sector-specific considerations:
Retail shop
Key working capital items include stock (which may need to be funded before it generates sales), supplier credit terms, cash float and any customer gift vouchers or deposits outstanding. Seasonal businesses — Christmas gifts, summer clothing — can have very significant working capital fluctuations through the year.
Restaurant or café
Food and drink stock turn very quickly and are typically low value at any given time. The more significant working capital items are usually payroll (staff wages due within days), supplier credit terms for food, drink and packaging, gift vouchers outstanding, and the timing of VAT payments. Cash-heavy businesses need particular attention to the cash cycle.
Construction or trades business
Construction businesses can have very high working capital requirements because of the gap between paying for materials and labour (upfront) and receiving staged payments from clients (later). Retention amounts — money held back by clients pending completion of works — can lock up significant cash for extended periods. Work-in-progress can be substantial and its valuation is complex.
SaaS or subscription business
Working capital for a SaaS business is often driven by deferred revenue — money received from customers in advance for subscriptions that have not yet been delivered. This is a liability on the balance sheet. It needs to be carefully distinguished from cash, because the buyer inherits both the cash and the obligation to continue delivering the service.
Wholesale or distribution
Wholesale businesses often carry large stock quantities and have significant trade debtor and creditor positions. The stock cycle — buying, storing, selling, waiting for payment — can lock up very significant working capital. Stock age and quality need careful review.
Care or healthcare business
Care businesses often face a timing mismatch between when services are delivered and when local authority or NHS commissioners pay. Payroll is a major fixed cost that must be met regardless of payment timing. Working capital requirements can be substantial and relatively inflexible.
Common working capital mistakes
Both buyers and sellers frequently make avoidable mistakes around working capital in business sales.
Spending all available cash on the purchase price.A buyer who exhausts their funds paying for the business and retains nothing for working capital may face a cash crisis within days of completion. Always model the post-completion cash position before committing to a price.
Ignoring stock.In businesses with significant stock, the stock level at completion — and its quality — directly affects working capital. Inflated, obsolete or overvalued stock gives the buyer a false sense of security.
Not checking aged debtors.Old, slow-moving or disputed debtors may never be collected. If they are included in the working capital definition, their true realisable value matters.
Ignoring creditor ageing.A business that is behind on supplier payments may face immediate demands after completion. Always review the aged creditor report, not just the total balance.
Forgetting VAT and PAYE timing.A quarterly VAT bill or monthly PAYE payment falling shortly after completion can create a significant cash demand that was not planned for.
Leaving working capital undefined.Vague wording in heads of terms — "business sold as a going concern" — says nothing specific about which working capital items are included or excluded. This is the single biggest cause of working capital disputes.
Treating high turnover as evidence of strong cash flow.A business with £1 million turnover and 60-day debtor days has a very different cash position from one with £1 million turnover and immediate payment. Revenue and cash are not the same thing.
Missing customer prepayments and gift vouchers.These are balance sheet liabilities — the business has received money but not yet delivered the goods or services. If they transfer to the buyer, the buyer inherits the obligation. If they stay with the seller, the buyer takes over the relationship without the cash.
Ignoring seasonality.A business that is in its peak trading season at completion may have elevated stock and debtors — and will need more working capital than the monthly average suggests once the season ends and those assets need to be funded.
Not involving accountants.Working capital analysis, normal working capital calculations and completion accounts mechanisms are accounting tasks. They require professional input from accountants familiar with business acquisitions.
Working capital checklist
Buyer checklist
Working capital definition agreed and documented in heads of terms
Stock treatment confirmed — included in price, valued separately, or excluded?
Trade debtors — do they transfer to the buyer or remain with the seller?
Trade creditors — do they transfer to the buyer or remain with the seller?
Cash — is this included in the deal or retained by the seller (cash-free deal)?
Customer deposits and gift vouchers — do they transfer and is the liability reflected in the price?
Work-in-progress — how is it defined and valued?
VAT and PAYE timing reviewed — are any large payments due shortly after completion?
Post-completion cash requirement modelled — including wages, rent, stock, suppliers
Seasonal working capital needs considered
Normal working capital target agreed and evidenced from historical data (if applicable)
Completion adjustment mechanism understood — who prepares, timeline, dispute process
Accountant engaged to review working capital position and post-completion cash needs
Stress-tested: what happens to cash flow if revenue is 15–20% lower than expected?
Seller checklist
Working capital definition agreed and documented in heads of terms
Confirmed which items you retain (cash, debtors, pre-sale creditors)
Confirmed which items transfer to the buyer (stock, WIP, customer deposits)
Stock valuation method agreed
WIP valuation method agreed (if applicable)
Customer prepayments and gift vouchers treatment agreed
Confirmed whether completion accounts or locked box applies
Normal working capital target agreed (for completion accounts deals)
Tax and accounting advice taken on working capital treatment
Aware of restrictions on drawing cash or running down working capital between signing and completion (locked box)
FAQs
Is working capital included in the purchase price?
It depends on the deal structure and what the parties have agreed. In an asset purchase, working capital items are often individually specified — stock may be included, debtors may stay with the seller. In a share purchase, working capital typically forms part of the company and may be adjusted through a completion accounts mechanism. There is no standard answer — it must be agreed and documented.
Is stock a working capital item?
Usually yes. Stock is a current asset and is typically treated as part of working capital. In some deals, particularly asset purchases, stock is valued and priced separately from the goodwill and other business assets. In share purchases, stock is usually part of the working capital calculation.
Are debtors included when buying a business?
In an asset purchase, trade debtors (money owed by customers at the date of sale) are usually retained by the seller — they collect the outstanding invoices and retain the proceeds. In a share purchase, debtors typically remain in the company and therefore transfer to the buyer. The agreement should specify this clearly, including the treatment of aged or disputed debtors.
What is a working capital adjustment?
A working capital adjustment is a price adjustment in a share sale that accounts for the difference between the agreed normal working capital level and the actual working capital at completion. If the actual working capital is lower than agreed, the buyer receives a price reduction. If it is higher, the buyer pays more. This ensures the seller cannot strip the business of cash or stock before completion without financial consequence.
Why does working capital matter if the business is profitable?
Because profit is not the same as cash. A business can be highly profitable on paper while simultaneously running short of cash — because it has large amounts tied up in stock, slow-paying customers, or debtors. The working capital cycle — paying costs before collecting revenue — requires a constant cash cushion. Without it, even a profitable business can fail to meet its obligations.
How much working capital do I need to retain after completion?
It varies by sector and business. A general rule of thumb is to retain at least one to three months of the business's fixed costs (wages, rent, regular supplier payments) as a working capital buffer after completion. For cash-hungry businesses — construction, wholesale, care — the requirement may be higher. Your accountant should help you model the specific cash flow cycle of the business you are buying.
Key takeaways
Working capital is the money needed to run the business day to day— stock, debtors, creditors, cash and short-term obligations.
Buyers need cash after completion.Spending everything on the purchase price and retaining nothing for working capital is one of the most common and dangerous mistakes in business acquisitions.
Sellers need clarity on what they keep.Without a clear definition, disputes over cash, debtors, creditors and stock are almost inevitable.
Asset sales and share sales treat working capital differently.In an asset purchase, items are negotiated individually. In a share purchase, the company retains its balance sheet and completion adjustments are common.
Normal working capital must be defined and agreed.Vague wording leads to disputes. The definition should be agreed at heads of terms stage.
Completion adjustments can significantly change the final price.Both parties need to understand the mechanism and its financial implications.
Working capital is a technical area.It should be reviewed by accountants familiar with business acquisitions, not resolved by assumption or informal discussion.
Related resources
Important disclaimer
Buy a Business Ltd is a marketplace, not a broker, corporate finance adviser, M&A adviser, law firm, accountant, tax adviser, lender, valuation firm, surveyor, insolvency practitioner or investment adviser. Information, guides, checklists and examples on this site are for general guidance only and do not constitute legal, tax, financial, investment, lending, valuation, property, employment, data protection, brokerage, corporate finance, M&A or regulated advice.
Buying or selling a business involves risk. You should seek independent professional advice before buying, selling, valuing, financing, negotiating or completing a business purchase.
Sources and useful references
GOV.UK: Transfer a business as a going concern — VAT Notice 700/9
GOV.UK: Business transfers, takeovers and TUPE
Companies House / GOV.UK: Get information about a company
FRS 102: The Financial Reporting Standard applicable in the UK — current assets and liabilities