Selling your healthcare business involves many moving parts, and one area that often catches sellers off guard is how working capital is treated in a transaction. Buyers typically expect to receive a significant portion of it as part of the transaction, which — if not negotiated properly — can impact seller expectations of cash at closing.
So, what exactly is working capital, and how does it impact your final sale price? More importantly, what is the “true-up” process after a transaction, and why does it matter? Let’s break it down so you know what to expect when going through a sale process. To help you navigate this aspect of the sale, we’re breaking down what working capital is and what to expect in a transaction.
What Is Working Capital?
Working capital represents the short-term financial health of your business. It is calculated as:
Current Assets – Current Liabilities = Working Capital
In simpler terms, working capital is the cash, accounts receivable, and other short-term assets your business has available after paying off short-term liabilities like vendor invoices, payroll obligations, and outstanding debts. It ensures that a company has enough liquidity to continue operating efficiently in the immediate future.
Why Does Working Capital Matter in a Sale?
When buyers acquire a healthcare business, they want to ensure it has enough working capital to sustain operations throughout the transition period. Many buyers will stipulate that working capital is included in the sale price — meaning they expect to take control of your cash, accounts receivable, and prepaid expenses at the time of purchase to avoid any unnecessary interruptions with service.
As a seller, you will want to clearly define a normalized level of working capital to best set expectations for how it will be handled in a transaction. Negotiating working capital terms is critical to ensuring you don’t leave money on the table or end up owing money back to the buyer after the conclusion of the transaction.
How We Approach Working Capital Negotiations
At M&A Healthcare Advisors, we work to structure deals that set clear parameters regarding the amount of working capital expected to remain with the business. Our goal is to:
- Negotiate a fair net working capital figure that reflects only what’s needed for the business to operate post-closing.
- Protect you from unexpected financial losses due to miscalculations or buyer expectations.
The final working capital amount is typically negotiated upfront and included in the purchase agreement, but there’s still a reconciliation process after closing—this is where the “true-up” comes into play.
What Is the True-Up Process?
Even though a working capital target is set before closing, actual working capital levels can fluctuate month by month. The true-up process is a post-closing adjustment that ensures both parties receive a fair financial settlement.
Here’s how it works:
- Pre-Closing Estimate – Before a deal closes, both buyer and seller agree on an estimated working capital figure, usually based on historical financial data.
- Post-Closing Review – About 90 days after a transaction is completed, the buyer performs a detailed financial review to compare actual working capital to the agreed-upon estimate prior to the close.
- Adjustment Settlement – If there is an excess of working capital compared to the agreed amount, the seller receives the excess. If it falls short, the seller may need to pay the buyer the difference from their sale proceeds.
Example of a True-Up Adjustment
- Scenario 1 (Favorable toward the seller): The purchase agreement states that $500,000 in working capital will be included in the sale. After closing, the buyer determines that actual working capital was $550,000. The true up process affords the seller the extra $50,000.
- Scenario 2 (Favorable toward the buyer): The agreement includes $500,000 in working capital, but the post-closing review shows only $450,000 was available. The seller may need to refund the buyer the missing $50,000, which is typically taken from the holdback about (which is typically 10% and common in most transactions).
The true-up process ensures that the buyer receives the expected working capital to continue normal operations of the business while allowing the seller to recover any excess funds if working capital is above the agreed upon amount.
Key Takeaways for Sellers
- Negotiating working capital is a critical part of the process – Without careful planning, you could leave significant cash in the business that the buyer will take over.
- Buyers often expect a normalized level of working capital to be included in the deal – How you negotiate the working capital peg can have a significant impact on your total transaction value.
- The true-up process happens after closing – This adjustment ensures that working capital is fairly allocated based on the final numbers, and typically occurs around 90 days after closing.
- We help structure deals to ensure both parties are in clear agreement on the handling of working capital and true-up values.
Get Expert Guidance on Your Business Sale
Understanding working capital and the true-up process is essential to maximizing your sale price and avoiding unnecessary financial surprises. At M&A Healthcare Advisors, we specialize in structuring deals that protect sellers while ensuring the best chances of reaching a successful outcome.
If you’re considering selling your healthcare business and want further details on how to best prepare your financials for a sale process, we’re here to help.
Contact us today to discuss your options and start planning for a successful sale.
