Working-Capital Manipulation
What is a working capital peg and why does it matter?
Inventory and receivables growing faster than sales. Profit that ignores cash trapped in the business. Distributions accelerating in the year before the sale.
What to ask for
Suspecting a flag is not the same as verifying one. These are the documents and signals that turn a hunch into a decision.
- Monthly balance sheets for twenty-four months, not year-end snapshots.
- Receivable ageing, and whether the oldest bucket is growing.
- Inventory turns measured against sales, year over year.
- Owner distributions in the twelve months before the sale.
The question to ask the seller
“How much cash does the business need day to day, and is that working capital staying in at closing?”
Ask it in those words. A seller who answers straight is telling you something. A seller who dances is telling you more.
A business handed over with no working capital is a business you fund on day one, out of the same pocket that just made the down payment. That is the gap that turns a financed deal into a personal loan.
Set a working capital peg in the LOI, calculated from a trailing twelve-month average, with a dollar-for-dollar true-up at close. Agree the formula before you agree the price.
Re-price on the real number or walk.
Travels with
Flags that show up together.
Screening one of these usually turns up the others. They share a cause more often than they share a coincidence.
Every deal you read gets safer.
The flags live in the community, applied to real deals every week. Membership is complimentary.
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