How much working capital do I need after closing?

Buyers who budget only for the purchase price are routinely surprised by how much cash a business needs simply to keep operating through its first weeks under new ownership. Working capital is not a contingency — it is a predictable requirement that a careful buyer sizes before closing, not after the first payroll run reveals the gap.

What working capital actually covers

• Payroll and source deductions due before the next round of customer payments arrives
• Inventory that has to be bought and paid for before it is sold
• Supplier terms that may tighten under a new, unproven owner even when they were generous with the seller
• Deposits, licences and account transfers that have to be paid to get operating again
• A cushion for the slower weeks that commonly follow a change of ownership, whatever the reason

Why the cash-conversion cycle sets the number

How much working capital a business needs is driven by how long cash is tied up between paying for inputs and collecting from customers — its cash-conversion cycle. A business that collects from customers quickly and pays suppliers slowly needs comparatively little; one that carries significant inventory or extends credit to customers needs considerably more, regardless of how profitable it looks on paper.

How this gets negotiated into the deal

In many Canadian deals, the parties agree a working capital target, often called a peg, that the business must be left with at closing, with a true-up mechanism if the actual number comes in above or below it. This protects the buyer from inheriting a business that has been stripped of cash before handover, and protects the seller from being blamed for a working capital shortfall that is really the buyer’s ongoing operating requirement.

What to do before you sign

Model the working capital requirement from the target’s own historical cash-conversion cycle, not a generic industry assumption, and make sure the financing plan explicitly funds it. A buyer who has to draw on emergency credit in the first weeks to cover payroll starts the relationship with staff, suppliers and the lender from a position of weakness that is entirely avoidable with earlier planning.