Working Capital
Private Equity glossary · Valuation, Diligence, & Value Creation
Definition
Current assets minus current liabilities; a closing mechanism typically sets a target working capital that, when deviated from, adjusts the purchase price.
Working Capital in plain English
Working capital is the short-term money a business needs to run day to day: add up what it will soon collect (unpaid customer invoices, inventory on the shelf) and subtract what it must soon pay (bills to suppliers). If that number is healthy, the company can cover next month's costs without scrambling for cash. When someone buys a company, they expect a "normal" tank of this fuel to come with it, so the deal sets a target amount — if the seller hands over less working capital than promised, the buyer pays a bit less; if they leave more, the buyer pays a bit more. It's like buying a rental car and settling up over whether the gas tank was left full or half-empty.
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