Real Conversations About Building, Selling, and Transitioning Businesses: Working Capital

A Conversation with Tom Bronson and Jeremy Furtick of NorthStar Mergers & Acquisitions on Working Capital and Selling Your Business.

One of the biggest surprises business owners encounter when selling their company is working capital.

Most owners figure, “If I sell my business for $10 million, I’m getting a $10 million check.” Simple, right? But then, somewhere in the middle of all the paperwork and back-and-forth, you start hearing new terms—like “working capital peg,” “true-up,” or “cash requirements.” Suddenly, what sounded straightforward now feels way more complicated.

Working capital is one of the most misunderstood and emotionally charged aspects of selling a business.

To help business owners better understand how working capital actually works in an M&A transaction, we sat down with Tom Bronson and Jeremy Furtick from NorthStar Mergers & Acquisitions for a practical conversation about buyer expectations, seller surprises, and how preparation can help avoid costly mistakes during a transaction.

Here are their answers to our questions about working capital:

Q: Why are so many business owners surprised by working capital during a sale?

Tom Bronson:

Most business owners think that if they sell their company for $10 million, they’re getting a $10 million check. Then, somewhere in the process, they hear about working capital, and suddenly, things feel more complicated.

The timing of that surprise usually depends on who their advisor is.

If they’re working with a seasoned M&A professional, investment banker, or experienced business broker, then they’ve probably already had these conversations early in the process. They understand that multiple factors impact net proceeds — not just working capital, but also debt payoffs, transaction expenses, cash on hand, taxes, and other factors.

The sellers who get blindsided by working capital at the end usually had poor representation — or worse, no representation at all.

Most business owners are exceptional at what they do. They built successful companies because they know their business better than anyone else. But sometimes that success creates a blind spot, leading them to think they can navigate a transaction entirely on their own.

Selling a business is a completely different discipline.

Jeremy Furtick:

That’s exactly right. Most owners have spent years becoming experts in their business, not in mergers and acquisitions. And because they’ve been successful, they naturally believe they can handle the process themselves.

The problem is that selling a business introduces an entirely different set of mechanics and negotiations that they’ve never dealt with before. Working capital is one of those things that owners usually don’t fully understand until they’re deep into a transaction.

Q: How do you explain working capital to sellers in simple terms?

Jeremy Furtick:

The accounting definition usually isn’t the most helpful explanation.

I like to explain working capital as another operational asset of the business.

When you sell your company, you’re selling a going concern. The buyer expects to continue operating the business and replicate the revenue and profitability you historically produced. To do that, they need all the assets required to run the business.

That includes:

• Equipment

• Employees

• Customer relationships

• Systems and processes

• Inventory

• And enough liquidity to keep operations moving after closing

A trucking company obviously needs the trucks to continue operating. Sellers understand that immediately.

Working capital is really no different.

The challenge is that working capital is often made up of receivables and cash, and sellers naturally think:

“That’s my money. I already earned it.”

That’s where the disconnect happens.

Tom Bronson:

And that’s why the “fuel in the tank” analogy works so well.

You’re not just selling the engine of the business. The buyer expects enough fuel in the tank for the company to continue operating on day one after closing.

You wouldn’t buy a car and expect to tow it to a gas station because there’s no gas in it.

A business works the same way.

Q: Why do sellers struggle emotionally with working capital?

Jeremy Furtick:

A lot of it comes down to how sellers mentally calculate the transaction.

In their mind:

• $10 million purchase price

• Plus $3 million in receivables

• Plus $1 million in cash

  
  

Now they think the deal is worth $14 million to them.

Then they discover that some of that cash and AR needs to remain in the business as working capital. Suddenly, it feels like the value dropped from $14 million to $12 million — even though the purchase price itself never changed.

That can absolutely derail a deal if the seller isn’t psychologically prepared for it.

And by this point, they’re already exhausted from months of negotiations, diligence requests, and decision-making. We call it negotiation fatigue.

Sometimes sellers feel like they’ve “given and given” throughout the transaction, and now this becomes one more thing they’re being asked to leave behind.

Tom Bronson:

And emotionally, it’s hard because sellers view receivables and cash differently than buyers do.

The seller thinks:

“I already earned that money.”

But the buyer sees it as operational fuel needed to keep the business running after closing.

That’s why preparation matters so much. If you understand these mechanics early, then they don’t feel like surprise negotiations at the end.

Q: Why do recurring revenue businesses create additional working capital complexity?

Tom Bronson:

Recurring revenue businesses are where we often see the biggest confusion.

Let’s say a customer prepays $12,000 in January for a full year of service, and the business sells in July. The seller often thinks:

“That’s my money. I already earned it.”

But the buyer still has six months of service obligations remaining after closing.

In reality, part of that revenue still belongs on the balance sheet because the work hasn’t been completed yet. That’s where owners who don’t regularly review or understand their financial statements can really get blindsided.

I’m not saying owners need to become CPAs, but they absolutely should understand:

• Their balance sheet

• Deferred revenue

• How cash moves through the business

• And how those mechanics affect a transaction

Jeremy Furtick:

And this is one of the reasons working capital discussions can feel personal to sellers.

To them, it can feel like the buyer is trying to renegotiate the price or take money away from them.

In reality, it’s usually just the proper transfer of operational obligations from seller to buyer.

Q: What is a working capital “peg”?

Jeremy Furtick:

Think of the peg as the target amount of working capital the business should deliver at closing.

Every business is different, which is why this isn’t always a simple formula.

There are sidelines around working capital, but there’s a lot of field to play on in between those sidelines, depending on:

• Industry

• Seasonality

• Collection cycles

• Inventory needs

• Expense timing

If you’re buying a seasonal business during peak season, the company may require significantly more working capital than during slower periods.

So buyers and sellers establish a peg — usually based on historical averages — and, after closing, there’s often a true-up period where everyone compares the actual working capital needs against that target.

Tom Bronson:

And that peg itself is negotiable.

That’s one thing many sellers don’t understand.

Typically, buyers and sellers look at around 12 months of historical averages to establish what “normal” working capital looks like for that business.

Then after closing:

• If working capital exceeds the peg, the seller may receive additional proceeds.

• If it falls short, the seller may owe the difference.

The entire purpose is to avoid surprises and make sure the business has what it needs to continue operating successfully after closing.

Q: Why do emotions become such a major factor during transactions?

Tom Bronson:

Because selling a business is emotional. Always.

I’ve never seen a transaction where emotion didn’t show up somewhere near the end.

I had one seller years ago who was extremely analytical and logical. We talked for years about how emotional this process would become. Every time I mentioned it, he’d say:

“No, I’m fine. I totally understand this.” Then, about two weeks before closing, he called me and said: “You’ve got to talk me off the ledge.”

He told me he was feeling pressure in his chest and emotions he had never experienced before.

That’s normal.

You’re talking about the end of a major chapter in someone’s life. Sellers start asking themselves:

• Am I abandoning my employees?

• Did I get enough money?

• What am I going to do next?

• Is this the right decision?

  
  

A lot of our job is simply reminding everybody to breathe.

Jeremy Furtick:

And emotions happen on both sides.

Many buyers are making the biggest investment of their lives. Sellers are exiting something they’ve spent decades building. Spouses and family members are weighing in behind the scenes.

That’s one of the biggest hidden roles of a good advisor — acting as a filter.

Sometimes, a buyer calls in a panic because their lender needs something immediately. Sometimes, the seller had a terrible day personally and absolutely does not want to hear one more request.

If buyers and sellers communicated directly whenever emotions spiked, many more deals would fall apart.

Part of our role is to slow things down, remove unnecessary emotion, and help everybody focus on facts rather than panic.

Q: What is the single biggest thing business owners should remember about working capital?

Jeremy Furtick:

Don’t wait until you’re ready to sell to understand it.

Calculate your working capital requirements early.

• Understand what it actually takes to operate your business — not just how much cash you personally like keeping in the bank.

• And understand that working capital is only one piece of the transaction picture. Debt payoff, taxes, transaction expenses, and net proceeds all matter too.

  
  

The more educated you are before going to market, the smoother the process becomes.

Tom Bronson:

Every business on the planet will eventually transition.

Whether that’s five years or twenty years from now, every owner eventually exits their company one way or another.

My advice is simple: Don’t wait until you decide to sell to start looking for an M&A advisor.

Build those relationships early.

Get a professional valuation done.

Understand how buyers will look at your business. Learn how working capital, debt, taxes, and transaction expenses impact your actual net benefit.

The earlier you understand the mechanics of a transaction, the fewer surprises you’ll face when the time finally comes.

And ultimately, that preparation is what helps business owners become part of the 17% who successfully achieve their dream exit.

Selling a business is one of the most significant financial and emotional events in an owner’s life. Understanding concepts like working capital long before a transaction begins can dramatically improve both the process and the outcome.

At NorthStar Mergers & Acquisitions, the goal is not simply getting deals done. It is helping business owners navigate the journey to their dream exit with fewer surprises, stronger preparation, and experienced guidance every step of the way.

About NorthStar Mergers & Acquisitions

Based in Dallas, Texas, NorthStar Mergers & Acquisitions guides business owners through one of the most significant financial and emotional journeys of their lives—the sale of a company. Specializing in lower middle-market transactions across multiple industries, NorthStar combines deep valuation expertise, strategic marketing, and buyer engagement to ensure every client achieves their dream exit.

Visit NorthStar-Mergers.com to learn more about how NorthStar helps business owners navigate their ideal transition.