How to Calculate and Analyze Working Capital

What You’ll Learn in This Video

Why strong EBITDA does not guarantee enough cash to operate
How a $250K working capital gap nearly collapsed a deal
What working capital really is (and what it is not)
How to calculate working capital using monthly balance sheets
How to set a working capital peg before closing
Why working capital discussions kill deals if handled too late
How seasonality and industry type impact cash needs
How post-closing true-ups can protect your purchase price

Why This Strategy Works for Any Business

Working capital analysis applies to every industry, from commercial cleaning and consumer products to construction and software.

This approach:

Protects buyers from post-closing cash crunches
Ensures payroll, vendors, and operations continue uninterrupted
Reduces SBA default risk
Creates leverage in LOI and purchase agreement negotiations
Prevents dollar-for-dollar purchase price losses
Without adequate working capital, even profitable businesses fail.

Timestamps

0:00 – Daniel’s acquisition crisis story
1:58 – The $250K working capital bombshell
3:33 – What working capital analysis aims to solve
5:18 – Why working capital matters more than profitability
7:09 – SBA risk and early-failure scenarios
8:11 – Common deal killers in SMB acquisitions
9:17 – Why working capital must be discussed early
12:11 – How to calculate working capital (formula explained)
14:12 – Selecting the right working capital peg
15:41 – Consumer products example walkthrough
18:22 – Choosing 3, 6, or 12-month averages
20:03 – Working capital timeline from LOI to closing
23:20 – Construction businesses and high working capital intensity
26:16 – Negative working capital and low-intensity businesses
27:26 – The “gas tank” analogy for working capital
29:15 – What is NOT working capital
29:44 – How to define working capital in the purchase agreement

Step-by-Step Breakdown

Step 1: Analyze Monthly Balance Sheets
Request monthly balance sheets and calculate current assets minus current liabilities to identify cash trends and risk areas.

Step 2: Identify Trends and Seasonality
Review 12–36 months of data to understand fluctuations, receivable aging, payable acceleration, and operational cash needs.

Step 3: Set the Working Capital Peg Early
Use rolling averages to establish a defensible peg in the LOI and protect against post-closing shortfalls.

Final Thoughts & Call-to-Action

Working capital is the fuel that keeps your business running after closing. Without it, payroll stops, vendors go unpaid, and SBA payments continue regardless.

This Session is a part of the 2025 Business Acquisition Webinar Series. Hosted by Patrick of O'Connell Advisory Group

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