When selling an owner-managed business, one of the biggest deal-breakers is not valuation, tax, or legal issues, but something far more practical: working capital. Many SME owners underestimate how critical working capital is in mergers and acquisitions, and the consequences can be costly. Poor management of cash, receivables, and payables can derail negotiations, reduce sale value, or even collapse a deal entirely.
1. Buyers Expect a “Normal” Level of Working Capital
In most UK business sales, buyers expect the company to be handed over with a “normal” level of working capital: enough cash, stock, and receivables to continue trading without disruption. If working capital is below expectations, buyers will either reduce their offer or demand a working capital adjustment at completion.
2. Inconsistent Cash Flow Raises Red Flags
Erratic cash flow makes buyers nervous. It suggests weak financial controls, potential customer payment issues, or hidden liabilities. Even if profits look strong, poor cash management can undermine buyer confidence and force a price reduction.
3. Overstated Profits Can Be Exposed
Some businesses boost reported profits by delaying payments to suppliers or aggressively managing receivables. Buyers will uncover this during due diligence. Once adjusted for true working capital requirements, the apparent profitability may shrink, reducing the valuation and weakening the seller’s negotiating position.
4. Disputes at Completion Are Common
Working capital is one of the most frequent sources of dispute in M&A transactions. Without clear preparation and supporting evidence, sellers may face claims for adjustments after completion, eroding the value they thought they had secured.
5. Preparation Protects Value
Good working capital management is not just about keeping the lights on. It is a key driver of deal success. Steps to take before going to market include: preparing normalised working capital levels in line with industry expectations, tightening credit control and receivables management, reviewing supplier terms and payment policies, and preparing robust documentation to support working capital assumptions.
Final Thoughts
A strong valuation and keen buyer interest mean little if your working capital position is weak. Buyers want certainty, and poor management of working capital raises doubts that can cost you value or even the deal itself.
