One of the biggest mistakes I continue to see is sellers ignoring the working capital peg when a business is first brought to market.
In today’s market, most business acquisitions under $5 million are being purchased by SBA buyers. Even many strategic buyers are utilizing SBA financing. Yet sellers, brokers, and advisors often focus almost entirely on the asking price and SDE while overlooking one of the most important components of the transaction.
The working capital requirement.
When I sit down with a seller to determine a value and a listing price, I believe we should also be discussing the expected working capital peg and how the transaction is likely to be structured from an SBA buyer’s perspective.
Why?
Because that’s how the majority of buyers are evaluating the opportunity.
The buyer isn’t just looking at the purchase price. The buyer is looking at the total amount of capital required to complete the acquisition and successfully operate the business after closing.
That includes:
- Purchase Price
- Required Equity Injection
- Working Capital Peg
- Closing Costs
- Post-Closing Liquidity
If the working capital peg is not addressed upfront, it often becomes an issue during due diligence. The seller may believe they are keeping all excess cash and receivables. The buyer and lender may believe additional working capital needs to remain in the business. Suddenly, a transaction that appeared straightforward becomes much more complicated.
In my experience, the smoothest transactions occur when the business is positioned for sale with a realistic asking price, a clearly defined working capital expectation, and a financing structure that can actually be supported by the SBA market.
The reality is simple. Most buyers are not purchasing businesses with cash. They are purchasing them with financing.
If we understand how those buyers and lenders will evaluate the opportunity before the business goes to market, we can eliminate many of the surprises that slow transactions down or cause them to fall apart.
A properly prepared offering should not only answer the question, “What is the business worth?”
It should also answer the question, “How is a qualified buyer going to buy it?”
The more clarity we provide upfront regarding price, working capital, and financing structure, the smoother the transaction will be for everyone involved.
After all, the goal isn’t just to list a business.
The goal is to get it sold.