Most owners think a signed letter of intent means the hard part is over.
It doesn’t.
The number feels settled. The buyer has completed due diligence. The attorneys are preparing closing documents.
Then someone asks a simple question:
How much working capital will be in the business on closing day?
That question can reopen the economics of the entire deal.
Not because either side is acting in bad faith. Usually, the problem is that “normal working capital” was never defined clearly enough.
For Alabama owners in construction, HVAC, property management, and professional services, this issue deserves attention well before the final week.
A working capital discussion handled early can make closing a formality instead of a fight.
What is working capital in a business sale?
In plain English, working capital is the money tied up in the normal day-to-day operation of your business.
In a transaction, buyers usually focus on net working capital, which often includes:
- Accounts receivable
- Inventory
- Work in progress
- Prepaid operating expenses
- Accounts payable
- Accrued operating expenses
Cash and debt are often handled separately. But the exact definition is negotiated in the purchase agreement.
That detail matters.
A buyer is generally not purchasing a business that has been emptied of its operating resources. The buyer expects to receive a company that can continue serving customers, paying vendors, meeting payroll, and completing existing work after closing.
The working capital peg is the agreed dollar amount that represents a normal level of working capital for that business.
If the business delivers less than the peg, the purchase price may be reduced.
If it delivers more, the seller may receive an upward adjustment.
A simplified formula looks like this:
Closing working capital − agreed working capital peg = purchase price adjustment
The adjustment is often dollar for dollar.
That is why a seemingly minor disagreement over receivables or payables can become significant at the closing table.
Why the final week creates tension
Working capital is usually estimated at closing and finalized afterward.
The parties may agree to an estimated closing balance sheet. Then, after closing, the buyer reviews the actual accounts as of the closing date. The final calculation may occur 60 to 120 days later, depending on the agreement.
That creates several points of friction.
The seller may believe the business is being delivered in its ordinary condition.
The buyer may believe certain receivables are old, certain inventory is unusable, or certain liabilities were not properly recorded.
Both sides may be looking at the same accounting records and reaching different conclusions.
The problem usually begins earlier, when the peg is based on a single snapshot instead of the business’s operating history.
A company that closes in January may not have the same working capital needs as one that closes in July.
The number needs context.
Alabama businesses do not operate in a straight line
Seasonality is one of the main reasons working capital becomes complicated for Alabama businesses.
A Birmingham HVAC company may build receivables during a hot summer while carrying more parts and equipment. A contractor in Huntsville or Mobile may have large project costs before receiving a progress payment.
A property management company may see timing differences around lease renewals, owner distributions, maintenance costs, and security deposits.
A professional services firm may have significant unbilled work in progress at month-end, especially when projects are billed at milestones.
A single month can make the business look overfunded or underfunded.
Neither conclusion may be accurate.
For that reason, buyers and sellers often examine monthly working capital over the trailing 12 months. In more seasonal businesses, they may also compare the proposed closing month with the same month in the prior year.
The objective is not to choose the lowest possible number for the seller or the highest possible number for the buyer.
The objective is to identify what the business normally needs to operate.
That is the number the peg should represent.
Receivables are not all equal
Accounts receivable often creates the most disagreement.
A balance sheet may show $400,000 in receivables. That does not necessarily mean the buyer is receiving $400,000 of usable value.
Buyers will usually want to understand:
- How old the invoices are
- Which customers owe the money
- Whether the invoices are disputed
- Whether retainage is included
- Whether the customer has a history of slow payment
- Whether the receivables were collected consistently in the past
Construction businesses may have progress billings, retainage, change orders, and invoices dependent on project completion.
HVAC and home-service businesses may have a large number of smaller invoices, some of which are collected quickly and others that require repeated follow-up.
Professional services firms may have unbilled work that is valuable, but only if it can be billed and collected after closing.
The purchase agreement should explain how these items are treated.
A seller should not assume that every dollar listed under accounts receivable will count at full value.
A buyer should not assume that every older receivable is worthless.
The quality, history, and collectability of the receivable balance matter.
Inventory can create a quiet dispute
Inventory is another common source of disagreement.
A business may carry truck stock, replacement parts, materials purchased for a project, or finished goods. Some items may be essential to the next month of operations. Others may have been sitting unused for years.
Buyers commonly ask whether inventory is:
- Current and saleable
- Needed to fulfill existing work
- Obsolete
- Damaged
- Owned by the business
- Already committed to a customer or project
This is especially important for Alabama contractors and HVAC companies, where inventory may be distributed across vehicles, job sites, warehouses, and employee locations.
A year-end inventory count is not enough if the closing occurs months later.
The better approach is to establish a repeatable count and valuation process before the transaction reaches its final stage.
If inventory is included in the peg, the parties should agree on how it will be counted and valued.
The peg should reflect the business you are selling
A common mistake is to calculate working capital using a number that does not match the business being delivered.
For example, a seller may collect a large amount of receivables immediately before closing. That improves cash but may reduce the receivables included in working capital.
A seller may also delay paying ordinary vendor bills. That increases cash temporarily but may increase accounts payable and reduce closing working capital.
Neither approach creates lasting value.
The buyer is evaluating whether the business has its normal operating resources, not whether the balance sheet looked favorable for one week.
The same principle applies to inventory.
Running down inventory to increase cash may leave the buyer without the parts or materials needed to complete current work.
Buying an unusually large amount of inventory immediately before closing may create a different dispute if the buyer does not believe the items are necessary or properly valued.
The goal is consistency.
Normal operations should continue through closing.
How to prepare before a buyer asks
You do not need to wait until a letter of intent is signed to prepare for the working capital discussion.
Start with these steps.
1. Define the accounts
Work with your advisors to identify which accounts should be included in net working capital.
Do not leave this to broad phrases such as “ordinary working capital.”
The agreement should address accounts receivable, inventory, work in progress, prepaids, accounts payable, accrued expenses, customer deposits, and other relevant balances.
2. Build a monthly history
Prepare at least 12 months of monthly working capital information.
For a seasonal Alabama business, 18 to 24 months may provide a clearer picture.
The goal is to show normal fluctuations rather than rely on the month when the business happens to be sold.
3. Review aged receivables
Clean up old receivables before marketing the business.
Document disputed invoices. Identify retainage. Separate unusual balances from ordinary trade receivables.
A buyer will have more confidence when the records explain the balance.
4. Count and classify inventory
Create a practical inventory list.
Identify slow-moving, obsolete, damaged, or job-specific items. Keep supporting invoices where appropriate.
This reduces the chance of a last-minute disagreement over what the business actually owns.
5. Continue ordinary operations
Do not change collection, purchasing, or payment practices simply to improve the closing balance sheet.
Unusual actions can create questions and may produce an adjustment that is worse than the original issue.
6. Put the methodology in writing
The purchase agreement should explain the peg, the included accounts, the accounting principles, the closing estimate, and the post-closing true-up process.
A numerical example can help both sides understand how the adjustment will work.
What a business broker in Alabama should help you see
A good business broker Alabama owners work with should help identify this issue before it becomes a closing problem.
That does not mean the broker replaces your CPA or attorney.
It means the broker helps coordinate the business, financial, and transaction discussions so the parties are working from the same operating facts.
For businesses across Birmingham, Huntsville, Mobile, Montgomery, Tuscaloosa, and smaller Alabama communities, buyer interest may come from outside the immediate market. The working capital analysis still needs to reflect the local business model, customer payment patterns, project cycles, and seasonal demands.
At Biz Broker Alabama, the sale process includes preparation, valuation, confidential marketing, negotiation, and closing coordination.
A working capital review is part of understanding how buyers will evaluate the business.
It is also part of protecting the seller’s expectations.
The closing conversation should not be a surprise
Working capital is not a technical issue that belongs only to accountants.
It affects the price you receive.
More importantly, it affects whether the buyer believes the business has been presented fairly.
When the peg is based on clean records, monthly history, reasonable seasonality adjustments, and a clear definition of included accounts, the final calculation is easier for everyone.
There may still be a true-up.
But it should confirm the agreement, not rewrite it.
If you want more visibility into what a buyer may examine, a professional valuation request can be a practical starting point. You can also review related Alabama business sale insights before deciding what preparation makes sense for your timeline.
The purpose is not to rush toward a sale.
It is to give you control over the details that determine how the sale unfolds.
