Net working capital
Current assets less current liabilities, excluding cash and debt — the operating fuel a buyer expects to be delivered with the business.
Also called: NWC · Working capital
A buyer paying for a going concern expects to receive enough receivables and inventory to keep running on day one without immediately injecting cash. Net working capital measures that: accounts receivable plus inventory plus prepaid expenses, less accounts payable and accrued liabilities. Cash and interest-bearing debt are excluded, because those are settled separately in a cash-free debt-free structure.
The complication is that working capital moves constantly, and it moves seasonally in most businesses. A landscaping company in March looks nothing like the same company in October. So the parties agree a target — the peg — usually from a twelve-month average, and settle the difference in cash after closing.
This is one of the few negotiation points that is pure arithmetic and still routinely costs sellers real money, because it is discussed late, by lawyers, after the price is emotionally settled. Collecting aggressively and stretching payables in the months before close does not help either: it lowers your delivered working capital against the peg and you pay the shortfall.
Where sellers get caught
- Draining receivables before close and paying for it dollar-for-dollar in the settlement.
- Letting the peg be set from a period that flatters the buyer — check which twelve months it uses.
- Leaving obsolete inventory on the books. A buyer will write it down and the peg calculation follows.
Common questions
Why is cash excluded from working capital?
Because in a cash-free debt-free deal the seller keeps the cash and clears the debt at close. Including cash would double-count it against the price.
Can the working capital adjustment go in my favour?
Yes. If you deliver more working capital than the peg, the buyer typically pays the excess. It is a two-way settlement, which is why the peg itself is worth negotiating carefully.
Related terms
Working capital peg
The agreed level of net working capital the business must have at closing, with any shortfall or excess settled in cash afterwards.
Enterprise value
The value of the business itself, independent of how it is financed — and not the amount the seller receives.
Cash-free debt-free
A pricing convention where the seller keeps the cash and clears the debt at closing, and the agreed enterprise value assumes neither is present.
Due diligence
The buyer's post-LOI investigation of the business, covering financial, legal, commercial, tax, and operational matters.
Guides that use this term
Where net working capital comes up in a real sale, and what it changes.
Last reviewed 2026-08-25. General information for business owners, not legal, tax, or financial advice — terms, thresholds, and tax treatment vary by jurisdiction and by deal.