When buyers first scan a listing for a business for sale in London Ontario, they tend to look at price, revenue, and EBITDA. Those numbers matter, but they can hide a lurking variable that makes or breaks the deal after closing: working capital. If you have ever taken over a company and discovered the shelves were stocked, but the bank account was bare, you already know why this topic deserves a spotlight.
Working capital sounds abstract until payroll is due and your largest customer is 45 days late. It defines the cash cushion that lets a business breathe day to day, keep suppliers cooperative, and deliver on promises. In a market like London, where many owner-managed companies rely on repeat customers and seasonal rhythms, underestimating working capital can turn a fair purchase into an expensive lesson.
This article shares practical guidance on how to evaluate, negotiate, and manage working capital when you buy a business in London. It also explains how local norms and financing conditions shape decisions on what is “included” in a deal. Whether you are scouting listings through Liquid Sunset Business Brokers - business for sale in london ontario or consulting advisors to buy a business in london ontario, the logic is the same: define working capital clearly, measure it honestly, and document it precisely.
What working capital really means in a small business sale
At its simplest, working capital equals current assets minus current liabilities. In a typical owner-operated business, the key moving parts are:
- Accounts receivable, inventory, accounts payable, accrued liabilities, and cash.
You will see different formulations in purchase agreements. Some exclude cash entirely and define a “target” for net working capital that includes receivables, inventory, and payables. Others include a normal level of cash and insist on a debt-free, cash-free structure for everything else. The convention varies by industry and size.
The working capital a business needs is not a static number. It scales with revenue, seasonality, collection practices, vendor terms, and the owner’s habits. Two plumbers with identical revenue can require very different working capital. One may collect deposits up front and pay vendors at day 45, the other may extend 30-day terms to customers and pay suppliers in 15 days. On paper the income statements look similar, yet one owner lives with a full bank account while the other juggles line-of-credit draws every week.
If you are reviewing a listing with Liquid Sunset Business Brokers - business brokers london ontario, ask how the seller defines working capital for that specific business. Sometimes the listing already hints at this, with phrases like “includes normalized net working capital” or “cash-free, debt-free, with working capital peg to be set.” That sentence deserves a longer conversation.
Why working capital matters to your first 100 days
You close a deal on a Friday. On Monday, you inherit suppliers to pay, customers to service, and staff who expect payroll every two weeks. Unless you are buying a cash-and-carry operation, receivables will lag behind sales. If the seller drains cash and leaves thin receivables, you may be forced to inject cash on day one just to function. I have seen buyers spend months chasing what they assumed they were purchasing: a stable float of receivables and inventory.
The first 100 days bring a few predictable stress tests. Inventory turns slow down when you re-order conservatively. Customer payments slip while you update invoicing details and banking information. Banks delay line-of-credit advances until final security registrations clear. It is no accident that experienced acquirers negotiate a working capital peg and true-up. It reduces those first weeks of turbulence.
Setting a working capital target, not a guess
The strongest deals define a target working capital level, often called the “peg,” anchored to the historical needs of the business. The peg locks in how much working capital the seller must deliver at closing. If actual working capital on the closing balance sheet is above the peg, the purchase price increases dollar for dollar. If it is below, the purchase price decreases or the seller funds the shortfall.
Here is a practical way to determine the peg:
First, analyze monthly working capital over 12 to 24 months. Seasonality in London is real, especially for construction trades, outdoor services, restaurants with tourist spikes, and retailers tied to university calendars. The right peg reflects those swings.
Second, normalize for unusual events. If the business stocked up on inventory for a one-time project or let receivables age due to a sales push that stretched customer terms, adjust for that. This is where judgment matters more than spreadsheets.
Third, confirm the classification. Inventory counts need to be real. I have walked shop floors where “inventory” included unsellable returns, parts for obsolete equipment, and a back corner of odd fittings someone might need someday. Either exclude obsolete items from the working capital definition or discount them heavily. Receivables older than 90 days also deserve a haircut unless there is specific evidence of collectability.
Fourth, test the peg against budgeted sales. If you expect to grow revenue 15 percent in the first year, working capital will grow too. The peg should reflect the business as-is at closing. Your growth requires your capital unless you negotiate otherwise.
When buyers reach out through Liquid Sunset Business Brokers - buying a business in london, the agents will often provide an adjusted working capital history if the seller has prepared for market. If they do not, request the monthly balance sheet and any inventory aging reports. Good brokers know that a clear peg reduces friction later.
The dance around cash: include it or not?
Most small to mid-market deals in Canada use a cash-free, debt-free structure. That means the seller keeps operating cash and pays off interest-bearing debt at closing. Working capital then excludes cash and debt. In practice, the seller often leaves a nominal account balance to cover small payments on day one, but that is a courtesy rather than a promise.
Some buyers prefer to include a defined amount of cash in working capital. The logic is clean: receivables are uncertain, inventory takes time to sell, payables come due on schedule. A cash buffer reduces risk. Sellers push back because they value cash at 100 cents on the dollar, while buyers may discount receivables or inventory. The compromise is to set a peg that produces a steady state, then plan a separate cash injection or line-of-credit availability at closing so the company operates smoothly.
In London, lenders are generally comfortable with asset-backed lines tied to receivables and inventory for established companies. Start conversations early. The bank’s advance rates and reserves directly affect how much cash you need to bring to closing. If your lender advances 75 to 85 percent on eligible receivables and 30 to 60 percent on clean inventory, run that math before you finalize the peg.
Receivables, terms, and the customer relationship handoff
Receivables are not just numbers. They represent relationships. When a new owner takes over, a small fraction of customers slow pay while they adjust. It is not personal. Their AP teams update vendor records in batches, or wait for formal notice of the ownership change. Sometimes they get nervous about warranties or service continuity and hold a payment cycle. Plan for it.
If you can, visit or call the top ten customers before closing, with the seller’s introduction, and walk through billing and payment details. Confirm addresses, contacts, and purchase order requirements. Reissue W-9 or CRA forms as needed. The goal is to shorten the payment gap that often appears right after a transition.
Another trick that works: clarify the handling of pre-closing receivables in the purchase agreement. Many deals let the seller keep receivables from before closing, with the buyer providing collection services for a limited period. Others convey the receivables to the buyer as part of working capital. Both can work. If the seller keeps pre-closing receivables, ensure your agreement allocates customer payments correctly so you do not fund the seller’s cash flow with your post-close work.
Inventory you can sell versus inventory you will store
Inventory always looks better on a spreadsheet than on a shelf. Counts are off, descriptions get lazy, and margins change with new supplier terms. If you are acquiring a parts-heavy or product-heavy business, insist on an organized count and a clear policy on obsolescence. In some cases, a swap-out or buy-back agreement with suppliers can save you later headaches.
Inventory valuation methods affect the peg. Many small businesses use average cost. Some mix FIFO in practice with average cost on paper. During diligence, test a sample: pick twenty items, verify quantities physically, confirm last purchase cost, and analyze recent sales. If you find slow movers that have not sold in a year, treat them like an asset only if your plan includes monetizing them. If the list includes consignment or customer-owned items, strip them out.
I once reviewed a fabrication shop where one-third of the “inventory” was customer-specific steel cutoffs that legally belonged to those customers. The previous owner never tracked custody precisely. We carved out that stock, reset the peg, and included a clause for customer claims discovered post-close. It kept everyone honest.
Payables, accrued liabilities, and the surprises you avoid by asking
On the liabilities side, payables are straightforward if you match invoices to deliveries and confirm aging. Watch for payables that the seller regularly paid late. Habitual lateness can signal cash strain or a supplier relationship in decline. You do not want to inherit a fragile chain because the previous owner stretched terms for years.
Accrued liabilities deserve more attention than they usually receive. Payroll accruals, vacation pay, bonuses, warranty obligations, sales tax payable, and gift card liabilities can add up. I have seen closing statements derailed by unrecorded vacation banks or unpaid source deductions. Small business accounting often treats these as estimates. Your job is to convert those estimates into specific amounts and then decide whether they belong in working capital or as debts excluded from it.
Warranty accruals deserve a special mention for service businesses and manufacturers. If the seller provided multi-year warranties but never set aside a reserve, you should. Adjust the peg or purchase price accordingly. Do not rely on “we have never had an issue” as a policy.
Reading local patterns in London, Ontario
London’s business community contains a mix of professional services, light manufacturing, distribution, healthcare clinics, trades, hospitality, and retail. The workforce is stable, and the local economy benefits from the university, hospitals, and regional logistics networks. Working capital patterns reflect that mix.
Professional service firms and clinics often have low inventory, decent receivables, and clean payables. Their working capital risk lies in client retention and insurance billing cycles. Distribution and light manufacturing businesses carry more inventory, often with supplier terms that flex based on volume. Hospitality and retail handle cash and cards daily, but supplier terms can be strict, and seasonality matters.
If you explore a business for sale in London Ontario through a group like Liquid Sunset Business Brokers - buying a business london, ask for a monthly working capital schedule by business unit if the company has multiple lines. A distribution arm can mask the cash needs of a service line, or vice versa. Get granular.
Negotiating the peg and the true-up without starting a food fight
Deals collapse when parties treat the peg like a weapon. It should be a mechanic, not a trick. The more you discuss early, the less drama at closing.
A useful approach is to agree on the method before you argue the number. Document the components included in working capital, the valuation methodology for inventory, the aging policy for receivables, the classification of accruals, and the treatment of unusual items. Then produce a schedule that calculates monthly working capital for the last 12 months using that shared method. Pick the trailing twelve-month average, or the average of the same months last year if seasonality dominates, and use that as the peg.
Include a clear process for the post-close true-up. Set a timeline for preparing the closing balance sheet, a dispute window, and a mechanism for resolving differences. Many deals use an independent accounting firm as tie-breaker. Escrows help keep the conversation rational, since both sides know there is a pot of funds set aside for adjustments.
Financing, covenants, and the link to working capital
Debt providers care about liquidity. Your loan agreement will likely include a current ratio covenant, a fixed charge coverage ratio, or both. Blowing a covenant because your working capital sagged after closing is the kind of avoidable error that keeps you up at night. Bring your lender into the discussion about the peg. Share your first-year budget with monthly cash flow. Confirm how the bank will calculate eligibility for your line. Some lenders exclude receivables over 90 days, foreign receivables without insurance, or certain categories of inventory. These exclusions can be material.
When clients approach us through Liquid Sunset Business Brokers - buy a business london ontario with a short closing window, we advise them to secure indicative terms for a line of credit early. A good banker will run a borrowing base simulation using the target’s aging reports. It becomes obvious quickly whether you need an extra cash buffer.
Tax and legal wrinkles that change the math
Asset deals and share deals handle working capital differently. In an asset deal, you cherry-pick assets and liabilities, and it is common to exclude most liabilities except trade payables and accrued expenses specifically listed. In a share deal, you acquire the corporate entity, so you inherit all assets and liabilities unless excluded. The peg still applies, but the baseline can shift.
Sales tax can be a trap. If the seller has CRA liabilities for HST not remitted, you need to ensure those are settled or that you hold back sufficient funds. In share deals, tax clearances from CRA reduce the risk but take time. Payroll remittances and vacation accruals need the same scrutiny. These items may not sit on the radar of a busy owner, yet they are real cash obligations.
Employment law deserves a footnote here. When you take employees with accrued vacation or earned bonuses, you either assume the liability or adjust the purchase price. Decide intentionally, because it affects your working capital needs in the first year.
The human factor: owner habits shape working capital
I once reviewed two near-identical HVAC companies in the same industrial park. Company A trained technicians to collect 50 percent deposits on big installs and required a mobile payment at job completion for service calls. Company B billed everything at month end. Company A had a positive cash cycle, Company B ran a permanent overdraft. The income statements did not show the difference, but the bank statements shouted it.
Ask the seller about habits that affect cash: deposit policies, discounting for early payment, how they chase receivables, and how they stagger payables. Observe the service process and the sales admin workflow. A small tweak, such as invoicing the same day rather than weekly, can swing days sales outstanding by a meaningful margin. If your plan includes changing these habits, do not bank on instant results. People adapt, but it takes coaching and systems.
Documenting working capital in the purchase agreement
A clear agreement translates diligence observations into enforceable language. The definitions section should specify which balance sheet accounts count as working capital and how they are valued. Spell out aging thresholds for receivables eligibility, the exclusion of uncollectible accounts, the method for inventory valuation, and the treatment of consignment or customer-owned stock. Identify accruals included, such as vacation pay, and those excluded, like long-term lease obligations.
The closing mechanics should detail the calculation of the peg, the preparation of the closing balance sheet, the review period, and the dispute resolution process. Include the cash-free, debt-free principle if you are using it, and list the debts to be paid at closing. Set any escrows or holdbacks necessary for true-up adjustments and contingent liabilities. Good legal drafting saves you from re-litigating accounting in the weeks after you take over.
Step-by-step path to a clean working capital outcome
- Request monthly balance sheets and aging reports for receivables, payables, and inventory for at least 12 months. Define what counts as working capital, line by line, with clear policies for valuation and eligibility. Build a monthly working capital schedule and choose a reasonable peg, adjusted for seasonality and one-time events. Align financing with the peg, running borrowing base simulations with your lender. Document the true-up mechanics, including timelines, dispute resolution, and any escrows.
This checklist is short on purpose. If you follow it, you will avoid 90 percent of closing-day surprises.
Edge cases and judgment calls you may face
Sometimes the seller operates multiple locations and only sells one. Shared receivables and payables must be carved out. Allocate fairly or you will inherit a mismatch.
Certain businesses run customer deposits as liabilities. If the company collects deposits for future work, those deposits sit on the balance sheet as deferred revenue. Decide whether those deposits fund the work you will perform post-close or relate to projects the seller must complete. The answer changes your required cash.
Vendor rebates can distort payables. Distributors and manufacturers often accrue year-end rebates based on volume. If you close mid-year, the rebate balance may belong partly to you and partly to the seller. Address it explicitly.
Gift cards and loyalty points in retail and hospitality can create real obligations. If a restaurant sold $40,000 in gift cards during the holidays and half remains unused, you will redeem a portion in the coming months. Recognize it now.
Projects in progress complicate service businesses. Work in process sits between inventory and receivables. Agree on how to value partially completed work and who gets paid for which milestone.
How brokers can smooth the path
A capable broker will push both parties to clarify working capital early. Firms like Liquid Sunset Business Brokers - buy a business in london ontario, when they are engaged by a seller, coach owners to clean up aging reports, trim obsolete inventory, and normalize accruals before going to market. When they represent buyers, they push for thorough schedules and fair definitions. The goal is not to win a skirmish over a few thousand dollars at closing, but to deliver a stable operation that meets its next payroll and delights its customers.
Brokers also set expectations. They explain to sellers why a peg does not reduce price arbitrarily. It converts an implicit assumption, that the business will have enough working capital to run, into an explicit commitment. That clarity keeps deals alive.
Practical cash planning for the first quarter after close
Even with a clean peg and true-up, assume the first quarter will consume more cash than you expect. New vendors may shorten terms until they know you. Insurance premiums may be front-loaded. Your payroll dates likely shift to align with your systems. You may invest in basic improvements the seller deferred. I advise buyers to reserve an additional one to two months of operating expenses as a contingency, separate from the peg and from any growth capital.
Track a weekly cash flow for the first 13 weeks. That simple discipline reveals small leaks before they become floods. Have your controller or bookkeeper send a short Monday summary: cash on hand, expected receipts and disbursements for the week, any aging spikes, and borrowing base availability. For many owner-operated businesses, this single report becomes the most valuable habit you adopt.
What a healthy working capital profile looks like
Healthy does not mean high. It means appropriate. For a service firm in London with $4 million in revenue, receivables around 45 days, minimal inventory, and predictable payroll, net working capital might sit between 10 and 15 percent of annual revenue. For a distributor at $8 million with two months of inventory and 30-day terms on both sides, net working capital could run 15 to 25 percent. The exact numbers depend on margins and process discipline.
Watch trendlines, not snapshots. If receivables creep from 38 days to 52 days, something changed in billing or collections. If inventory days climb steadily, you either overbought or sales slowed. If payables stretch, you may be leaning on suppliers to fund operations. None of these are moral judgments. They are signals asking for attention.
Final thoughts from the trenches
Over many transactions in and around London, the most common regret I hear is simple: “I wish we had nailed down working capital earlier.” It is the quiet variable that dictates your stress level during the handoff. Treat it as a core part of the deal, not a footnote. Ask better questions, push for clean schedules, and do the walkthroughs that reveal how cash actually moves through the business.
If you are scouring listings through Liquid Sunset Business Brokers - business for sale in london ontario or planning to engage Liquid Sunset Business Brokers - buying a business london for a targeted search, bring working capital to Discover here the front of your conversations. It is not glamorous, but it is the measure that gives you time to solve the interesting problems, like culture, growth, and customer experience, once you own the keys.