faq deep dive · 6 min read
The working capital target: the term that quietly changes your wire
By Ray Whitfield, Charlotte-region manufacturing exit specialist: what industrial companies in the Carolinas are worth, which buyers compete for them, and what the year before a sale has to look like.. Published August 11, 2026.
Owners negotiate the multiple for months and agree the working capital definition in an afternoon. It is frequently the more expensive of the two.
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Call (704) 343-6770What it is
Nearly every offer for a manufacturing company at this size is made on a cash-free, debt-free basis, assuming a normal level of working capital is delivered at closing. Working capital here means the receivables, inventory, and payables the business needs to keep operating.
The buyer sets a target, usually from a trailing twelve-month average. At closing, actual working capital is measured against the target, and the purchase price adjusts dollar for dollar in whichever direction the difference runs.
Why it costs sellers money
Three reasons, all common.
First, the reference period. A trailing average that includes an unusually lean stretch sets a low target and a high one sets it the other way; which twelve months are used is negotiable and frequently is not negotiated.
Second, seller behavior before closing. An owner who runs inventory down, pushes collections hard, or stretches payables in the final months is effectively taking cash out of the working capital that has been promised, and funds the shortfall out of the proceeds at closing.
Third, the definition itself. Whether certain items count as working capital or as debt, including accrued bonuses, customer deposits, deferred revenue, and tooling advances, is a drafting question with real money attached.
What to do about it
Settle it in the letter of intent, not in the purchase agreement. By the time the purchase agreement is being drafted, the buyer has exclusivity and the seller has spent months, which is not the moment to open a new negotiation.
Ask for the calculation in writing with the reference period stated, model your own normal working capital cycle across a full year including any seasonality, and have your CPA review the definitions line by line. On a manufacturing company with inventory and work in process, this single term can move the final wire by more than a quarter turn of EBITDA, which is more than most owners gain from the last round of price negotiation.