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So you’re a business owner selling your company to a private equity firm. You don’t have an investment banker representing you. You just signed an LOI for a number you’re thrilled with. You’re already thinking about closing day. Then the buyer introduces a term you may have never heard before: Net Working Capital. And it can have a very real impact on how much money you actually receive at closing. Here’s what you need to know: 1. Think of your business like a car. The purchase price buys the car. But the car still needs enough gas in the tank to operate normally when the buyer takes the keys. That “gas” is essentially what Net Working Capital is trying to measure. 2. In a typical transaction, Net Working Capital is generally: Current Operating Assets minus Current Operating Liabilities Think: Accounts Receivable Inventory certain other operating current assets – Accounts Payable – accrued operating expenses – certain other operating current liabilities Cash and debt are typically handled separately. 3. Why does the buyer care? Because they negotiated a price for an operating business. They expect you to deliver one. They don’t want to pay $50 million for your company on Friday… …and then discover on Monday that they immediately need to inject another $3 million because you collected receivables, stopped buying inventory, or delayed paying vendors before closing. 4. Back to the car. Imagine buying a car from a dealership. You agree on the price. You sign the paperwork. Then, before handing you the keys, the dealer siphons almost all the gas out of the tank. Technically, you still bought the same car. But you didn’t receive it in the condition necessary to use it normally. That’s what a buyer is trying to prevent with a Net Working Capital requirement. 5. So during the deal, the buyer and seller typically negotiate a Net Working Capital Target (sometimes called a “peg”). That target represents the normalized amount of working capital (“gas”) the business is expected to have at closing. And the word normalized matters. A lot. 6. Say your negotiated NWC target is $5 million. At closing, your actual Net Working Capital is $4 million. You’re $1 million short. Generally, that $1 million reduces your purchase price. Now flip it. If closing NWC is $6 million, you may receive a $1 million upward adjustment. The exact mechanics depend on the purchase agreement. 7. This is where sellers without experienced representation can get hurt. Because calculating the number is only part of the negotiation. The bigger questions are: What accounts are included? What accounts are excluded? What accounting policies are used? What historical period determines “normal”? How is seasonality treated? What happens with unusual or non-recurring items? Those decisions can move the number materially. 8. And here’s something many business owners don’t realize: You can negotiate an incredible headline purchase price… …and still leave millions of dollars on the table through the details underneath it. Net Working Capital. Debt-like items. Transaction expenses. Earnouts. Indemnification. Escrows. Purchase price adjustments. The number at the top of the LOI isn’t necessarily the number that hits your bank account. 9. This is also why waiting until after signing an LOI to understand Net Working Capital is dangerous. Once you sign an LOI and enter exclusivity, the negotiating leverage can change dramatically. The buyer does deals for a living. Most business owners sell a company once. That experience gap matters. 10. So if you’re selling your business, remember the car: Enterprise value buys the car. Working capital is the gas required to keep it running normally. The buyer expects enough gas in the tank to drive the business forward on Day 1. And exactly how much gas you’re required to leave behind? That’s a negotiation worth understanding before you sign the LOI.