Working capital: the money you need on day one that nobody mentions

Working capital is the cash tied up in running the business — stock on the shelves, invoices customers have not paid, bills you owe. Buy a business without it and you own something profitable that cannot make payroll on the second Friday.

Why this bites first-time buyers hardest

Most Main Street deals are asset sales, and the seller usually keeps the cash and often the receivables. So on day one you may own equipment, a lease and a customer list — and nothing to buy stock with, while the wages of the staff you inherited fall due in ten days.

Nothing in the listing warns about this. The CIM shows profit, and profit is not cash.

The rough arithmetic

Working capital = current assets − current liabilities, in practice: inventory + receivables − payables. Three questions settle what you actually need:

How long does cash take to come back? Buy stock, sell it, wait for payment. In a shop that is days; in a business invoicing on 60-day terms it is months, and every month of growth makes the hole deeper.
What is the seasonal low point? A landscaping business in February and in June are different companies. Size the requirement to the trough, not to the average.
What leaves with the seller? Supplier terms are often personal. A new owner frequently starts on prepayment for the first months, which converts trade credit into cash you have to find.

The peg

In deals where working capital does transfer, the agreement sets a peg: the normal level the seller must leave behind, usually an average of recent months. At closing the actual figure is measured, and the price moves dollar-for-dollar against the peg. Without a peg, a seller can legitimately collect every receivable, run stock down to nothing and hand you an empty shell for the same price.

What to do about it

Ask for the balance sheet as well as the P&L, and for an inventory count and an accounts-receivable ageing.
Include working capital in the loan. SBA acquisition financing can cover it; asking afterwards is much harder than asking upfront — see SBA 7(a).
Check the receivables you are buying, if you are buying them: anything over ninety days is worth what someone will actually pay for it, not its face value.
Model the first ninety days in cash, not in profit. It is the single most useful spreadsheet a first-time buyer makes.

Questions buyers ask

Does the seller have to leave working capital in the business?

Only if the agreement says so. In many Main Street asset sales the seller keeps the cash and the receivables, which is legitimate — and it means the buyer funds inventory, payroll and supplier terms from their own pocket from day one. Where working capital does transfer, a peg fixes the normal level and adjusts the price against it.

Can an SBA loan cover working capital in an acquisition?

Yes, SBA 7(a) acquisition financing can include working capital, and building it into the request is far easier than going back for more after closing. Size it against the seasonal low point and the cash-conversion cycle, not against an average month.

Debt Service Coverage Ratio (DSCR) — DSCR is the cash a business produces divided by the loan payments it owes.
Asset sale vs stock sale — In an asset sale you buy the things the business is made of and leave most of its history behind.
SBA 7(a) loan (business acquisition) — The SBA 7(a) programme is how most first-time buyers finance a Main Street purchase.

Checking a real deal? DealLoupe reads the documents a seller gave you and reports the red flags, the gaps and the questions to ask — before you spend anything on due diligence. See what a pre-screen costs →

Last updated: 2026-08-22