Working Capital
The operating liquidity of a business, typically calculated as current assets minus current liabilities.
Full Definition
Working capital represents the short-term operating liquidity of a business, reflecting the capital tied up in day-to-day operations. It is a critical component of M&A pricing and completion mechanics.
Basic calculation: Working Capital = Current Assets - Current Liabilities
Typical components: Current Assets:
- Trade receivables (debtors)
- Inventory (stock)
- Prepayments
- Accrued income
Current Liabilities:
- Trade payables (creditors)
- Accruals
- Deferred income
- VAT and other taxes payable
Working capital in M&A:
- Normalised working capital: Average level required to operate
- Target working capital: Agreed level at completion
- Working capital adjustment: True-up if actual differs from target
Common approach: 1. Calculate historical working capital (12-24 month average) 2. Agree normalised level as target 3. Completion accounts measure actual working capital 4. Price adjusted for variance from target
Key negotiation points:
- Definition of working capital items
- Normalisation adjustments
- Seasonality considerations
- Target level calculation
- Collar/cap on adjustments
Proper working capital mechanics ensure the buyer receives a business with adequate operating liquidity without overpaying.
Related Terms
Completion Accounts
Financial statements prepared at completion to calculate final adjustments to the purchase price.
Net Debt
Total debt minus cash, representing the net financial obligations that reduce a company's equity value.
Purchase Price
The total consideration paid by the buyer to acquire the target business or its shares.
Locked Box
A pricing mechanism where the purchase price is fixed at a historical date with no completion accounts adjustment.