Walk into most small business acquisitions and you will hear plenty about price, multiples, and handover plans. The quiet variable that actually determines whether you sleep well after closing is working capital. Get it wrong and a seemingly fair price can feel like daylight robbery the week you take over payroll. Get it right and cash flows as expected, your lenders stay calm, and the first ninety days feel manageable instead of manic.
I have sat on both sides of the table in London deals, and the patterns repeat. Buyers focus on EBITDA and miss the cash that keeps the machine running. Sellers talk about their hard work and brand, but forget the receivables they have effectively financed for customers. Brokers try to keep everyone moving along, and the devil hides in definitions. Working capital is where deal craft shows.
What working capital really is, and why it matters more than price
Working capital, in plain terms, is the capital tied up in the day to day. In a typical cash free, debt free transaction, it is current assets minus current liabilities, usually excluding cash and any interest bearing debt. Receivables, inventory, and prepaids on one side. Payables, accrued expenses, payroll liabilities, and taxes on the other. The buyer wants enough of this net amount at closing to run the business at the level implied by the purchase price.
If you buy a café in Fitzrovia for 3.5 times EBITDA but step in with empty fridges and no milk supplier credit, you will wire fresh money on day one just to open the doors. If you buy a HVAC contractor in London, Ontario with a three month accounts receivable cycle but no allowance in the price for those receivables, cash will not hit the account in time to pay techs and wholesalers. This is why working capital is negotiated as a separate, explicit item: a target, or “peg,” with a post closing true up.
Conventions in London UK versus London, Ontario
Deal customs differ slightly between the United Kingdom and Canada, even if the logic is the same.
In London UK, mid market and many small deals use one of two mechanics. Completion accounts, where you close, then prepare a completion balance sheet, and adjust price up or down versus the agreed working capital peg. Or a locked box, where you fix value at a historical date and prevent value leakage to the seller between that date and closing, often with a simple interest-like “tick.” Locked box works well when numbers are stable and due diligence confidence is high. Completion accounts are better when trading is volatile, or the business is seasonal. Many London independent sellers lean toward locked box because it feels clean. Many buyers prefer completion accounts because they trust numbers they control.
In London, Ontario and across Canada, completion accounts with a net working capital target are common in lower mid market and small business transactions. Lenders and the Business Development Bank of Canada often expect to see a peg and a 60 to 90 day true up. You will also see holdbacks or escrow to secure adjustments. In asset deals, inventory is sometimes valued at closing and paid separately, while receivables and payables stay with the seller. In share deals, everything usually rolls to the buyer with a peg.
For small businesses, stability trumps elegance. If you are browsing a small business for sale London, or shortlisting companies for sale London through a broker, check how they handle working capital before you fall in love with a headline price. The same advice holds if you are reviewing businesses for sale London Ontario with a local advisor. Price plus peg beats price alone every time.
Before you sign an LOI, set the frame
Working capital fights often start because the letter of intent never mentioned it, or buried it in vague boilerplate. I prefer to set a frame early, even in an abbreviated way, so the seller does not feel surprised later. The aim is not to win the argument on page one, it is to agree there will be a peg, agree on the period used to calculate it, and agree on what counts.
A simple LOI sentence can avoid weeks of pain later: “Purchase price is on a cash free, debt free basis, inclusive of a normalised level of net working capital, defined as current assets excluding cash and income taxes, less current liabilities excluding interest bearing debt and income taxes, targeted at the average month end level over the trailing twelve months, to be adjusted post closing through completion accounts.”
If the seller bristles, that is useful data. It is better to learn now that you see the world differently, than after you have spent thousands on diligence. For buyers who want to buy a business in London, or buy a business in London Ontario, the broker’s template may or may not protect you. Clarify it yourself. If you are dealing with a business broker London Ontario based, ask them for examples of recent pegs in your sector and deal size. If you are speaking with London UK intermediaries, ask whether locked box is realistic given the recent trading pattern.
What counts and what does not
Definitions sound dull until a specific line item is worth six figures. Then they matter. You need to decide if the peg includes or excludes:
- Cash: typically excluded in a cash free, debt free deal. But petty cash in till based businesses often transfers as part of operations. Document it. Customer deposits and deferred revenue: I include them as current liabilities. If the seller has taken cash for work not yet performed, you inherit the obligation to deliver. This is one of the most common gaps in small business deals. VAT or HST: subtract unrecoverable tax liabilities. If the seller has unfiled VAT in the UK or HST in Ontario, that is a liability you do not want as a surprise. Recoverable input credits on inventory should sit in current assets. Related party balances: exclude them. Loans to owners disguised as receivables do not help you pay suppliers. Gift cards and loyalty points: treat as liabilities. The redemption rate may be low, but not zero. I often apply a redemption factor based on history. Merchant processor reserves and warranty reserves: they behave like liabilities. Better to include them.
Inventory deserves its own paragraph. You want inventory needed for normal sales, not a museum of obsolete SKUs. In both London and London Ontario retail deals, I have seen storerooms with stock older than the person counting it. Agree on an aging policy and valuation method. Cost is the default, but cost of dead stock is not economic cost. Use write downs informed by actual sell through.
Receivables are next. In service firms, customers often take 30 to 60 days to pay. Some go 90. Age bands matter. You can include receivables at gross, then carve out a specific reserve for older buckets. Or you can agree to exclude anything over 90 days from the peg entirely. Choose based on the quality you see during diligence.
Three snapshots from real deal rooms
A café in Shoreditch, independent owner, £600k revenue, £90k EBITDA. Headline price floated at £315k. The seller assumed a locked box off a March year end. When we pulled monthly balance sheets, net working capital swung with summer and holiday inventory purchases. The twelve month average NWC, excluding cash, was about £18k. December and July peaked around £25k. The seller’s accountant initially proposed a peg at year end NWC, about £5k. We ran a simple analysis of stock days and payable days, showed that a £5k peg would mean empty fridges and supplier COD. We settled on a £20k peg, with a one month post closing true up. Price stayed, but we paid for real food in the fridge, not just the vintage espresso machine.
A mechanical contractor in London, Ontario, $3.8 million revenue, $520k SDE. The broker listing under businesses for sale London Ontario highlighted strong cash flow. AR days were 62 on paper, but the top five customers routinely stretched payables to 75 days at fiscal year end. Inventory was a mix of van stock and special order parts. We agreed to use the average of month end NWC over the last twelve months, excluding retainage receivables. That averaged $310k. The seller tried to remove a $45k accrued bonus pool as non operating, but it was tied to field wages and had been paid each of the last three years. We kept it in. The deal closed with a $315k peg, 75 day true up, and a $100k escrow to secure adjustments.
An e commerce homewares seller based in North London, £2.2 million revenue, fulfillment through a 3PL. The owner pressed for a locked box approach. The trouble was ad spend and returns fluctuated week to week, and the stock pipeline sat on the water. With supply lines lengthening, the required inventory to sustain revenue had risen 25 percent year over year. Using a peg based on last year would undercapitalize the business. We built a forward looking peg by taking the last six months average, then adding a growth factor based on current reorder points. Closed with a £180k peg plus a separate inventory reconciliation at landed cost for in transit stock. Painful to negotiate, but the only way the buyer could avoid writing a personal cheque two weeks after completion.
Seasonality, growth, and why static pegs fail
The fastest way to a fair peg is to mirror the operating cycle you are actually buying. If the business is seasonal, use a seasonal average or set a different peg for different months with a completion accounts true up accordingly. Fashion retailers in central London often carry heavy stock for autumn and winter, then sell down into late spring. A single annual average makes nobody happy. Similarly, a business growing at 20 percent year over year needs more working capital than last year. If you pay a multiple on the bigger forward number but set a peg at the smaller past number, you will fund the gap yourself.
Growth also breaks simple rules about receivable quality. When an owner starts serving larger customers, payment terms lengthen. A nice new contract with a Big Four landlord looks impressive in a teaser from sunset business brokers or any other intermediary. It also means your cash sits in someone else’s bank for thirty extra days. Bake it into the peg.
Who pays for what: cash free, debt free does not mean liability free
Many first time buyers read “cash free, debt free” and assume they will not inherit anything ugly. The phrase is a valuation shorthand. It does not sweep away operational liabilities that arise in the normal course. You, as buyer, will assume payables to suppliers, payroll accrued between the last pay date and closing, VAT or HST that relates to post closing sales, and obligations to customers whose deposits you have taken.
If the seller wants to strip all working capital and deliver a hollow shell, the honest price is lower. I sometimes ask sellers to imagine they are keeping the business. Would they wire themselves money to refill the cupboards after completion? If yes, that money belongs in the deal.
Brokers, off market hunts, and how listings handle working capital
If you are canvassing off market business for sale opportunities in Greater London, working capital data will be thin until you get management accounts. Decide early whether you are Watch here comfortable with locked box exposure. Many off market deals rely on trust and speed. You will offset that risk by keeping a larger holdback and stipulating access to monthly numbers during the exclusivity period.
With listed small business for sale London teasers, figures often report EBITDA but skip the balance sheet. If you see a broker packet from Liquid Sunset Business Brokers, Sunset Business Brokers, or any other outfit that looks glossy but vague on working capital, ask for a monthly balance sheet with at least a year of history. Reputable business brokers London Ontario side are used to this question, and a good one will already have a working capital schedule prepared. When evaluating a business for sale in London Ontario, check whether the listing price assumes inventory and receivables are included, or priced separately. I have seen the phrase “plus stock at valuation” added as a footnote. That can swing price by a six figure amount.
Building the peg: data and judgment
There is a mechanical way to approach peg building that will save you hours of back and forth, and a qualitative overlay that prevents blind spots.
- Pull monthly balance sheets for at least the last twelve months. Compute net working capital each month, using your definitions. Graph it. The shape matters more than any single number. Pair the graph with monthly revenue. Check whether working capital scales with sales or spikes independently, for example when a single supplier tightened terms. Examine inventory aging, SKU obsolescence, and stock accuracy. For product businesses, perform or witness a count. In small shops, I have used bin sampling with a simple 80 or 120 line check to estimate error rates. If the error is more than 3 to 5 percent, do not accept book inventory as gospel. Age receivables. Reconcile top twenty accounts. Confirm credit memos and write offs. If you plan to factor or use receivables financing, align the peg to the eligible amount, not the gross. Review payables terms and accrued expenses. Payables that look generous on paper may be offset by early pay discounts the seller always took. If the owner paid COD for a finicky supplier, you may have less credit than the ledger implies.
That is the quantitative side. Judgment then steps in. If the business is pushing into new channels, if the supplier base is changing, if the team is short staffed in finance, the numbers will deform after closing. Your peg should absorb that or your price should reflect it.
Completion mechanics that keep friendships intact
Even the best peg needs a way to settle. Completion accounts work when both sides agree who prepares them, by when, and what standards apply. I like to specify that management prepares the first pass within 30 to 45 days, using consistent accounting policies, then the other side has 15 to 30 days to review, with a named independent accountant as tiebreaker. Keep thresholds in mind. I avoid arguing over pennies by setting a de minimis level for adjustments.
Locked box deals succeed when leakage protections are specific. Define permitted leakage clearly, such as market salaries and ordinary course payments. Prohibit dividends and related party payments after the locked box date. If the seller wants a ticking fee, tie it to a reference rate or a fixed per annum amount that reflects the time value of money, not a disguised price increase.
Escrow or holdbacks are your pressure valve. In smaller deals in London and London Ontario, 5 to 10 percent of price in escrow for 6 to 12 months is common, with a portion earmarked for working capital true up. If the seller is strong on covenant, they will accept this. If they refuse, ask yourself what risk they expect to materialise.
Financing and lender expectations
Lenders care about working capital in two ways. They want to know you are not undercapitalised on day one, and they want comfort that your cash conversion cycle can service debt. In the UK, clearing banks and asset based lenders will look closely at receivables quality if you plan to borrow against them. In Canada, the BDC and chartered banks will ask for a working capital schedule during underwriting. If you are buying a business for sale in London Ontario with a term loan that depends on steady cash flow, your peg negotiations indirectly determine covenant headroom.
If your deal model assumes a line of credit or overdraft, confirm that the facility will be in place on day one. Many buyers plan a facility for the second or third month and forget that suppliers still expect payment in week one. Do not rely on a personal card to float payroll. I have seen it more than once. It is not a good feeling.
Earnouts, price chips, and when to bend
Sometimes the seller’s position on working capital is emotionally fixed. They built the business frugally and hate the idea of leaving cash behind. Your choices are to walk, to chip price, or to defuse the issue with structure. An earnout that pays if revenue hits plan can soften a higher peg. A seller note that steps up in interest if receivables quality is worse than represented can also bridge a gap. These are blunt tools. Use them when logic fails.
One pragmatic approach, especially for buying a business London side with heavy seasonality, is to set the peg at a conservative level and agree a secondary adjustment tied to a specific metric, such as inventory turns in the quarter after closing. This aligns incentives without fighting over every ledger line.
Red flags I look for during working capital diligence
- Big swings between book and physical inventory without a clear process fix. If the last three counts had adjustments over 5 percent, expect surprises. Receivables concentrations where two or three customers are more than 40 percent of AR. Your peg should discount their balances or include a reserve. Deferred revenue not reconciled to service obligations. If gift cards, deposits, or maintenance plans lack a schedule, you are guessing. VAT or HST returns filed late, or with frequent reassessments. Tax liabilities at closing can turn a good deal sour fast. Owner friendly payables practices that will vanish after closing, such as a cousin’s supply company that offered 90 day terms. Your ledger will look worse than the seller’s within a month.
These red flags do not kill a deal by themselves. They just tell you where to push and how to price risk.
A short negotiation playbook you can borrow
- Anchor early with a clear LOI definition. Name what is in and out. Propose a period for calculating the peg. Bring visuals. A one page chart of monthly net working capital next to sales beats a ten page memo. Predict post closing reality. If you plan to change suppliers, shorten DSO with tighter credit control, or hold more safety stock, say so and reflect it in the peg. Trade structure, not principle. Be flexible on escrow mechanics or true up timing, firm on the notion that you need a normal level of working capital to run what you are buying. Use neutral third parties. If talks harden, propose a known local accountant to adjudicate the completion accounts. London and London Ontario both have firms used to this role.
Small detail, big effect: wording that avoids blowups
Language that looks harmless can cost or save you. “Consistent with past practice” seems fair until you find past practice is poorly documented. I prefer “consistent with past practice as reflected in the trial balances and schedules provided during diligence.” Similarly, when defining inventory value, specify “at the lower of cost and net realisable value, on a first in, first out basis, net of an obsolescence provision consistent with historical practice.” If that feels like legalese, it is. The one time you avoid a fight over ancient stock, you will thank yourself.
For receivables, add a sentence that any balances subject to known disputes or contra arrangements with suppliers are excluded or specifically reserved. For accrued expenses, name items like bonuses, holiday pay, and payroll taxes so there is no confusion later.
Local realities both sides of the Atlantic
A buyer chasing a business for sale in London UK that relies on tourists should expect peaks and troughs tied to events and the school calendar. Street level shops near transport hubs see footfall changes when service patterns shift. Build that into inventory and staffing patterns, and your peg. In London Ontario, snow and construction seasons change cash needs for trades and distributors. Payroll spikes after storms, receivables stretch when customers wait for insurance cheques. These are not abstract ideas, they are bank balance effects.
Another local quirk: landlord deposits. Central London commercial leases often require chunky deposits or rent paid quarterly in advance. If the seller prepaid, you should receive credit at closing. If you will have to post a new deposit, that is separate from working capital and belongs in your funds flow, not buried in the peg. In Ontario, utility deposits sometimes sit with the vendor’s personal accounts. Plan the transfers early so you do not inherit a dark warehouse on day three.
If you are the seller, make it easy to say yes
The fastest way to remove working capital as a battleground is to prepare for it. Sellers in both markets who provide a clean twelve month working capital schedule, inventory aging, receivables aging with notes on any slow payers, and a reconciliation of deferred revenue to open jobs will see fewer chips on price and softer escrow asks. If you intend to sell a business London Ontario side through business brokers London Ontario, ask them to draft this schedule before they go to market. If you prefer to find a buyer off market, you will look more credible if you show it unprompted.
Sellers sometimes fear that including a generous peg means leaving money behind. The opposite is true. You are more likely to hit your headline price if the buyer believes the business will run smoothly after handover. No buyer wants to wire a second tranche of equity during their first week. Show them they will not need to.
Final thought from the trenches
I once took over a small distribution business near Acton on a Friday. The peg had been fought over, but the math was sound. The team counted stock that afternoon, the finance lead closed the books, and we shook hands. Monday morning, our largest supplier tightened terms after the owner’s personal guarantee fell away. We had to prepay one container that month. Because our peg assumed normal payables terms but not this shock, we would have been underwater by Wednesday. The seller did not have to help. He did anyway, and we agreed a small price adjustment as part of the completion accounts. That experience reinforced my bias to plan for one or two jolts. Your peg is not a talisman. It is a tool that, combined with a calm head and a sensible structure, keeps a good deal good.
Whether you are buying a business in London or evaluating a business for sale in London Ontario, treat working capital as carefully as you treat price. Ask basic questions early, insist on clear definitions, and back your arguments with numbers that reflect how the business actually runs. If you do that, your first month will look like the pro forma you sketched on that hopeful first day. And you will be free to focus on customers and teams rather than spreadsheets and surprises.