Acquisition Working Capital: Separate the Price Peg from Operating Cash

Define the two questions separately

First ask which accounts transfer and how the purchase agreement measures the target and closing amounts. A cash-free, debt-free definition may exclude cash and financing debt, while treating selected operating liabilities differently. Do not import a textbook current-assets-minus-current-liabilities formula without reading the actual agreement.

Deloitte’s accounting guidance describes adjustments for shortfalls or excesses in the working capital stipulated by the parties.

Then ask how the acquired business will pay its bills. That requires dates for collections, payroll, supplier payments and other uses. A positive closing working-capital figure does not prove sufficient cash will be available when those obligations fall due.

Convert the balance sheet into collection and payment dates

Review receivables by expected collection date and realistic recoverability. Identify disputed balances, credits and concentration rather than assuming every invoice converts promptly to cash. Check inventory availability, condition and the time needed to sell it. Map accounts payable, accrued payroll and customer deposits to the obligations being assumed.

For an original hypothetical contract definition, $100,000 included receivables plus $50,000 included inventory minus $40,000 included payables equals $110,000 of defined working capital. That number is a net account balance, not $110,000 ready to spend. Confirm excluded items and reserves. Use the peg guide for target and closing-adjustment mechanics; avoid treating an item as both debt and working capital.

Forecast the near-term cash gap

The assumed $25,000 opening cash is separate funded operating cash. It is not the $110,000 contract-defined net balance above. On these limited assumptions, week two needs at least $10,000 additional cash just to avoid a negative balance; that is not a recommended reserve. Include every real use and an appropriate cushion in the actual funding plan. Forecast collections that arrive later than expected.

Reconcile funding and the closing statement

Specify whether operating cash comes from buyer equity, permitted acquisition financing, a line of credit or cash included in the sale. Availability depends on the actual terms. SBA’s 7(a) program includes working-capital and ownership-change uses subject to eligibility and lender requirements; it does not automatically fund the shortfall.

Keep inventory included in the price, incremental inventory purchases, the peg adjustment and additional liquidity as distinct lines. Review seasonality and the closing month with both parties. The accountant’s account schedule and the buyer’s cash forecast should reconcile, even though they answer different questions. Do not hide a funding gap by adding an unapproved line of credit or counting the same cash twice.