How Much Working Capital Should I Leave in an M&A Deal?

In the final stages of selling a software or technology company, one of the most overlooked — yet hotly negotiated — components is the working capital adjustment. Founders often ask: “How much working capital should I leave in the deal?” The answer is nuanced, and getting it wrong can cost you real dollars post-closing.

This article breaks down how working capital targets are set, why they matter, and how to protect your interests during negotiations. Whether you’re a SaaS founder preparing for exit or a private equity professional structuring a deal, understanding this mechanism is essential to avoiding surprises at the closing table.

What Is Working Capital in the Context of M&A?

Working capital, in M&A terms, typically refers to current assets minus current liabilities — excluding cash, debt, and sometimes deferred revenue, depending on the deal structure. It’s a measure of the short-term liquidity needed to keep the business running day-to-day.

In a transaction, the buyer expects the business to be delivered with a “normal” level of working capital — enough to operate without requiring an immediate cash infusion. This is known as the working capital peg or target.

Why Working Capital Targets Matter

Working capital adjustments are post-closing true-ups. If the actual working capital delivered at closing is above the target, the seller receives a positive adjustment. If it’s below, the buyer gets a reduction in the purchase price.

For example:

• Target working capital: $1.2 million
• Actual working capital at closing: $1.0 million
• Adjustment: -$200,000 from seller’s proceeds

In other words, the working capital you leave behind directly affects your net proceeds. That’s why it’s critical to understand how the peg is calculated and negotiated.

How Is the Working Capital Target Determined?

Buyers and sellers typically agree on a working capital target based on a historical average — often the trailing 12-month or trailing 6-month average of normalized working capital. However, this is not a one-size-fits-all formula.

Key considerations include:

• Seasonality: If your business has seasonal swings (e.g., Q4-heavy enterprise SaaS sales), a simple average may not reflect the true operating need.
• Growth trajectory: A fast-growing company may require more working capital to support expansion, which should be factored into the peg.
• Deferred revenue: In SaaS deals, deferred revenue is often excluded from working capital but can still impact cash flow. Treatment must be clearly defined.
• One-time items: Non-recurring expenses or receivables should be normalized out of the calculation.

Firms like iMerge often work with clients to model multiple working capital scenarios during the LOI and due diligence phases, ensuring the peg reflects the true operating needs of the business — not just a buyer-friendly average.

What’s a “Normal” Amount to Leave?

There’s no universal number, but here are some general benchmarks:

• SaaS companies: Working capital is often minimal due to upfront billing and low variable costs. Pegs may be close to zero or even negative (if deferred revenue is excluded).
• eCommerce businesses: Inventory-heavy models require more working capital. Pegs may be 10–20% of annual revenue, depending on inventory cycles.
• Professional services firms: Receivables and accrued expenses drive working capital. Pegs often reflect 1–2 months of operating expenses.

Ultimately, the right amount to leave is the amount needed to run the business as it has been run historically. Anything more is a gift to the buyer; anything less may trigger a clawback.

Common Pitfalls to Avoid

Working capital adjustments are fertile ground for post-closing disputes. Here are a few traps to watch for:

• Vague definitions: Ensure the purchase agreement clearly defines what’s included and excluded in working capital.
• Mismatch with accounting policies: If your financials are on a cash basis but the buyer uses accrual, adjustments can get messy fast.
• Ignoring seasonality: A peg based on a low point in the year can result in a large negative adjustment at closing.
• Not modeling scenarios: Sellers should run sensitivity analyses to understand how changes in receivables, payables, or inventory affect the adjustment.

As we noted in Completing Due Diligence Before the LOI, early preparation and financial clarity can prevent these issues from becoming deal-breakers.

Negotiation Strategies for Sellers

Here are a few ways to protect your interests when negotiating working capital:

• Push for a trailing average that reflects seasonality — not just a recent low point.
• Exclude non-operating items like intercompany receivables or one-time bonuses.
• Cap the adjustment range with a collar (e.g., +/- $100K) to limit post-closing surprises.
• Use a third-party quality of earnings (QoE) report to support your position with objective data.

In our experience at iMerge, sellers who engage early with advisors and proactively define working capital terms in the LOI stage are far more likely to avoid contentious negotiations later. This is especially true in deals involving asset versus stock sale structures, where working capital treatment can vary significantly.

Conclusion

Working capital may not be the headline number in your M&A deal, but it can quietly shift hundreds of thousands — or even millions — of dollars between buyer and seller. Understanding how the peg is set, what’s included, and how to negotiate it is essential to protecting your exit value.

Use this insight in your next board discussion or strategic planning session. When you’re ready, iMerge is available for private, advisor-level conversations.