Why Net Working Capital Matters in M&A Transactions (And How Buyers Can Get Burned)

Net working capital (NWC) isn’t the most glamorous part of an M&A deal, but it’s one of the most important. It’s the capital required to keep the business running including receivables, inventory, payables. If you don’t pay attention to it, you can end up overpaying or walking into a liquidity mess on Day 1. In a deal, NWC is usually normalized and pegged as part of the purchase agreement. The idea is to ensure the buyer receives a business that’s properly capitalized to operate post-close. But here’s the catch: it’s a negotiation and sellers know how to play the game. Example 1: Inflated Receivables, Deflated Reality In one deal I saw, a buyer inherited a receivables balance that looked healthy on paper. But buried in the detail was a chunk of slow-paying customers that hadn’t paid in 120+ days. The seller had been aggressive in counting these as collectible, and the buyer didn’t push back hard enough during diligence. Without our help, the buyer would have ended up eating a six-figure write-off and scrambed for working capital to fill the gap. Example 2: Inventory Games and Payables Stretching In another case, a seller pumped up inventory just before close by over-ordering to create the illusion of strong operational momentum. At the same time, they delayed paying suppliers to make the cash balance look stronger. If the Buyer didn't exclude this temporary spike when calculating the peg, they would have been left with excess stock, strained vendor relationships, and a shortfall in liquidity. These kinds of tactics aren’t rare. They’re part of the playbook. That’s why diligence around NWC isn’t just about crunching numbers. It’s about understanding behavior: how the business manages cash flow, what’s normal versus manufactured, and what’s sustainable. The takeaway? NWC adjustments can make or break the economics of a deal. If you don’t get the peg right, and look past the surface, you’re not just leaving value on the table. You’re potentially walking into a working capital trap that’ll cost you long after the ink is dry. DM me if you're interested in learning more about financial due diligence.