Net Working Capital
Net working capital is current operating assets minus current operating liabilities, typically excluding cash and debt. In transactions, buyers and sellers set a normalized working-capital target so the business transfers with enough operating liquidity. SaaS and services firms often misread this because deferred revenue, receivables, prepaid expenses, and accrued delivery costs do not behave like manufacturing inventory.
The working-capital peg is where operating reality meets purchase price. A seller can win the multiple and still give value back at close if receivables, deferred revenue, prepaid expenses, or accrued delivery obligations are not normalized correctly.
The right time to model NWC is before LOI, not after the buyer’s QoE team has defined the peg.
Related terms
- Bookings vs. Revenue — Bookings measure contracted sales commitments; revenue measures what can be recognized under accounting rules. Confusing them inflates forecasts and board confidence.
- Letter of Intent (LOI) — A non-binding transaction proposal that sets price, structure, exclusivity, diligence scope, and major conditions before definitive agreements.
- Quality of Earnings (QoE) — An independent forensic analysis of a target's reported earnings, normalizing for one-time items, accounting choices, and revenue-recognition decisions. The diligence step that determines real EBITDA.
Where this gets applied
- Financial Infrastructure — ARR waterfalls, deferred-revenue rules, board-pack standardization, FP&A architecture.
- Exit Readiness — Pre-LOI cleanup. Financial reporting normalization, contract hygiene, IP assignment review, customer-concentration mitigation.