For any landscape industry business owner navigating the exhilarating, yet grueling, process of selling his or her company, the focus is almost always on the big number: the enterprise value. It’s the headline figure that represents years of hard work. However, as many sellers discover late in the game, the final cash they walk away with can be significantly altered by a complex and often contentious negotiation over a concept known as “net working capital.”
Net working capital can be a difficult topic in landscaping M&A transactions, partly because of the natural seasonality of the landscaping business and partly because business owners often do not manage working capital in the same way a potential new owner would.
This single line item is one of the most common sources of post-closing disputes and can lead to a nasty surprise for a seller, potentially reducing their proceeds by tens or even hundreds of thousands of dollars. In the current M&A world, understanding and proactively managing your working capital is not just good financial practice; it’s a critical strategy for protecting your deal value.
What is Working Capital and Why Does it Matter in a Sale?
At its simplest, net working capital is the difference between your current operating assets (like accounts receivable and inventory) and your current operating liabilities (like accounts payable and accrued expenses). It’s the liquid assets required to run the day-to-day operations of the business without interruption.
When a buyer acquires your company, they are not just buying your brand and your assets; they are buying a functioning, ongoing operation. They expect the business to be delivered with enough fuel in the tank to operate smoothly from Day One without them having to inject a sudden infusion of cash just to pay suppliers or make payroll.
This is where the working capital “peg” or “target” comes in. The purchase agreement will stipulate that you must deliver the business with a “normal” level of working capital. This target is typically (but not always) calculated based on the average working capital your business has needed over the previous 12 months. At closing, your actual working capital is calculated, and if it’s below the agreed-upon target, the shortfall is deducted directly from your sale proceeds, dollar-for-dollar.
The Battleground of a Business Sale
The negotiation around the working capital target, and what gets included in the final calculation, can become a battleground. A buyer is incentivized to argue for a higher target, while the seller benefits from a lower one. Common areas of dispute include:
- Accounts Receivable (A/R): A buyer will closely scrutinize the quality of your receivables. Are there old, uncollectible invoices on your books? They will argue these should be written off and excluded from the working capital calculation, lowering your final number.
- Inventory: Is all of your inventory usable? A buyer may claim that some is obsolete or slow-moving and should be valued at zero, again reducing your delivered working capital.
- Accounts Payable (A/P): Sellers might be tempted to slow-walk payments to suppliers in the weeks before closing to hold onto cash. Buyers are wise to this. They will analyze your payment history and will view any unusual stretching of payables as an artificial and temporary inflation of your cash position, which they will want to normalize in the final calculation.
How to Protect Your Proceeds: A Proactive Strategy
You can avoid nasty surprises and protect your final sale price by managing working capital long before you get to the closing table.
- Start Managing 12 Months Out: Remember, the working capital target is typically based on a 12-month average. Begin running your business with a “deal-ready” mindset a full year before you plan to sell. Don’t let A/R age out, keep inventory clean, and pay your vendors on a normal, consistent schedule. This establishes a fair and defensible historical average.
- Scrub Your Balance Sheet: Before you even go to market, work with your CPA or an M&A advisor to clean up your balance sheet. Write off bad debt, liquidate obsolete inventory, and ensure all accrued expenses are properly recorded. Presenting a clean balance sheet from the start builds credibility.
- Negotiate the Definition Carefully: During negotiations, work with your M&A attorney to be incredibly specific about what is included and excluded in the working capital calculation. Do not rely on vague definitions. The formula should be clearly written into the purchase agreement to prevent ambiguity and future disputes.
- Resist Unusual Actions Before Closing: In the period between signing a letter of intent and the final closing, run your business as you always have. Resist the urge to aggressively collect receivables beyond the norm or delay payments to suppliers. Buyers will see this in the numbers, and it will only damage trust and lead to a more difficult true-up process after the sale.
By treating working capital with the strategic importance it deserves, you can ensure the number you celebrate on closing day is the number that actually hits your bank account. It’s the final, crucial step in realizing the full value of your life’s work.