Working capital: the most underfunded part of a deal

Ask a lender which part of an acquisition financing plan most often gets treated as an afterthought, and working capital comes up more consistently than almost anything else. It’s the cash a business needs to actually keep running on day one, separate from the money spent buying it, and it is remarkably easy for a buyer focused on negotiating the purchase price to overlook it entirely until it becomes a problem the week after closing.

Why it’s so easy to overlook

Most of the attention in an acquisition, from the buyer, the seller, and often the lender, concentrates on the purchase price and how it will be financed. It’s easy to assume, without examining it closely, that the business’s existing cash flow will simply carry a new owner through the transition. In practice, the cash sitting in the business’s bank account on closing day frequently does not transfer to the buyer under the terms of a typical asset purchase agreement, outstanding receivables have not yet been collected, and payroll, rent, and supplier payments do not pause just because ownership changed hands.

What actually creates the gap

• Accounts receivable and accounts payable timing, where a business is often owed money it hasn’t collected yet while still owing suppliers on the terms it has always operated under
• Seasonal swings, where a business needs to build inventory or bring on staff ahead of a busy period before that period’s revenue actually arrives
• A financing structure that directs most of the buyer’s available cash toward the purchase price itself, leaving little held back for the weeks immediately after closing
• A lender’s own security taking a first claim over receivables and inventory, which limits how much a buyer can count on those assets as a source of cash if something unexpected comes up early on

Why lenders ask about it even when the loan is for the assets

A lender sizing an acquisition loan is ultimately trying to judge whether the business can service its debt once the buyer is running it, and a purchase that leaves no cushion for day-to-day operating costs is a weaker credit story even where the underlying business is strong. That is one reason lenders increasingly ask a buyer directly what happens in the weeks immediately after closing, before revenue from the business itself has had time to build back up, rather than assuming the purchase price and the operating budget are two separate conversations that don’t affect each other.

How buyers typically fund the gap

A separate operating line of credit alongside the main term loan is one of the more common tools, giving a buyer access to short-term cash without having to draw against the acquisition financing itself. Some buyers ask their lender to size the loan request explicitly to include a working capital component, rather than sizing it to the purchase price alone, which requires being upfront about this need early in the underwriting conversation rather than discovering it late. Others negotiate a closing adjustment tied to the receivables and payables actually on the books at closing, so the buyer isn’t effectively paying for assets that haven’t converted to cash yet while also needing separate money to operate.

Keeping a personal cash reserve outside whatever is committed to the purchase itself is another practical step buyers take, precisely because working capital needs tend to show up in the first few weeks, before a new owner has had time to fully understand the business’s actual cash rhythm. This is exactly the kind of mechanism a lender will ask about directly during underwriting, and a buyer who arrives with a cash flow projection covering the weeks after closing, not just the purchase itself, tends to be taken more seriously than one who has only budgeted for the price.

Where sellers can help close the gap

A seller isn’t the only party who can address a working capital shortfall. Some sellers agree to leave a defined amount of cash or receivables in the business at closing rather than stripping it out beforehand, in effect financing part of the buyer’s early operating needs alongside whatever vendor take-back is already in the deal. Others agree to a longer transition period specifically so the incoming owner has time to build up their own operating reserve from the business’s own cash flow before taking full financial responsibility for it. Neither approach is standard in every deal, but both are common enough that a buyer facing a tight working capital picture should raise the question with the seller directly rather than assuming it can only be solved through additional borrowing.