Working capital: the silent dial that sets your price

A valuation that looks clean on paper can still shift €300k or more in the closing phase. Not because of a new negotiation tactic. Not because EBITDA was wrong. But because of one line near the bottom of the SPA: the working-capital target, or in deal jargon, the working-capital peg.

Working capital does not hit EBITDA directly, which is exactly why it stays under the radar in many SME transactions until the buyer's DD team produces a memo arguing operating working-capital needs are €400k higher than the year-end snapshot suggests. At that point the seller has two options: drop the price, or write a counter-memo that rarely gets the time it deserves.

What working capital actually is in a deal

In the accounts, working capital reads as current assets minus current liabilities. In a transaction context that is too crude. The buyer is not buying a balance sheet, they are buying a business that on closing day must have enough operational working capital to keep running without an immediate cash injection.

Every serious buyer therefore looks at operating working capital: inventory + trade receivables − trade payables, with related items like WIP and accruals. Cash, debt and non-operating liabilities sit in the separate cash-and-debt-free price bridge.

Why a year-end snapshot almost always lies

A year-end balance sheet is one day. For most SMEs it is not the representative day. A retailer reporting on 31 December: inventory low after the Christmas peak, receivables high (gift-card cycle), payables low (December settled before VAT). A horticulture wholesaler on 31 March: inventory peak before the season, receivables low, payables high. Three months later, the picture is unrecognisable.

Worked example. €8M wholesaler, year-end 31 March. Balance-sheet-date working capital: €1.2M. Rolling-12-month average: €1.8M. Selling cash-and-debt-free at the as-reported figure means the buyer is buying an empty tank. Day one post-closing they need to inject €600k just to keep the cycle running. A buyer who finds this in DD is no longer a buyer.

Four pillars of a defensible analysis

1. Rolling-12-month average. Build monthly opening and closing positions over at least 24 months. The rolling-12 is what you put forward as the SPA peg.
2. Seasonality correction. For tourism, retail, agro and construction, rolling-12 alone is not enough. Show the quarterly and monthly curve, reported vs. normalised, with a reason for outliers.
3. Strip non-recurring outliers. A six-month dispute with a major customer is not structural working capital. Document and exclude.
4. Trade payables, receivables and inventory separately. Three different dynamics. Inventory has seasonality and ageing. Receivables have an ageing analysis (anything over 90 days is partially uncollectable in practice). Payables have a payment rhythm, if the seller stretches suppliers in the last months to dress up the balance, it shows.

Locked box vs. completion accounts

Two dominant Benelux mechanisms decide who carries the working-capital risk between signing and closing.

Locked box: price is fixed on a historical balance date and the buyer carries operating results from there. The seller signs a no-leakage clause covering abnormal dividends, related-party costs and private spending. Pro: price certainty, no post-closing adjustments. Con: requires audited or near-audited accounts at the lock date and disciplined seller behaviour through to closing.

Completion accounts: price is provisional on signing, finalised on closing. Within 30 to 60 days post-closing, the parties produce a set of completion accounts with actual cash, debt and working-capital positions. Difference vs. peg becomes a cash settlement. Pro: no signing-to-closing normalisation conflict. Con: arguments can drag on for two months.

Why this is a software problem

The mechanics above are not conceptually hard. They are execution-heavy. Pulling 24 months of monthly working-capital components, splitting inventory, receivables and payables, weighting seasonality and producing a memo a DD team can reproduce, that is two to three days of an experienced M&A practitioner. On lower-mid-market deals, that economics no longer fits. Most SME transactions skip it or do half. Buyers exploit the gap. Upswitch ships a working-capital module that pulls monthly data through Silverfin, Octopus, Yuki, Exact or Twinfield, computes the rolling-12 and seasonality, and emits a DD-ready peg memo.

For sub-segment benchmarks, sellers and buyers cross-check the working-capital and EBITDA bands against the live published business-type data on the Upswitch Index. Each business type carries country-scoped EV/EBITDA, EV/Revenue and P/E ranges drawn from real Benelux transactions; the methodology page documents how every band is derived.