Working capital in a business sale: what owners should organize before diligence.

Transaction Advisory · Published August 4, 2026

Working capital can move from a routine accounting measure to a prominent diligence topic when an owner prepares to sell a business. At that stage, the most useful objective is not to predict the transaction outcome or establish a working-capital target. It is to make the company’s operating accounts consistent, reconcilable, and understandable.

Organized records help the seller and the seller’s advisers respond to questions efficiently. They can also reveal accounting cleanup that should be addressed before information is shared more broadly.

Begin with the transaction-specific nature of working capital

Working capital in a sale is not necessarily identical to the full current-assets-minus-current-liabilities calculation appearing on a balance sheet. The accounts included in a transaction calculation depend on the structure and terms developed by the parties and their legal and transaction advisers.

An owner can prepare without assuming what the final definition will be. The practical first step is to organize the accounts that reflect short-term business operations, document how they have been recorded, and preserve a clear connection to the general ledger. This preparation does not establish a working-capital target or “peg.” It creates reliable information that the seller’s advisers can use when evaluating transaction-specific terms.

Build a consistent monthly history

Start with monthly balance sheets and supporting ledgers for the periods that are reasonably available. The appropriate period depends on the business, its seasonality, the quality of earlier records, and the expectations of the sale process.

For each month:

• Reconcile the working-capital accounts to the general ledger.
• Use consistent account groupings across the period.
• Identify changes in accounting practices or account mappings.
• Retain support for material reconciling items.
• Clearly label estimates, reclassifications, and management judgments.
• Avoid changing prior-period classifications merely to create a smoother pattern.

If the chart of accounts changed, create a documented mapping between the old and new accounts. A consistent schedule that reconciles to the books is generally more useful than a polished presentation that cannot be traced to source records.

Organize the major operating accounts

Accounts receivable

The receivables aging should reconcile to the general ledger and clearly show invoices, credit memos, write-offs, unapplied cash, and other adjustments. Management should identify disputed balances, significant concentrations, related-party items, and unusual collection issues.

Subsequent collections may help explain the status of older receivables, but they should be presented as factual support—not as a guarantee that every recorded balance is collectible.

Inventory

Where inventory is significant, reconcile the inventory records to the general ledger and document the locations, count procedures, costing methods, reserves, write-downs, and material adjustments used by the company.

Investigate negative quantities, inactive items, unexplained count differences, goods held at outside locations, consigned goods, and transactions close to period-end. Management remains responsible for physical counts, costing judgments, obsolescence assessments, and the resulting accounting records.

Accounts payable and accrued expenses

The accounts-payable aging should agree with the general ledger and reflect vendor invoices, credits, and payments in the proper period. Compare significant vendor statements with the company’s records and investigate unmatched receiving activity, invoices received after month-end, and unusual debit balances.

Also organize recurring accruals such as payroll, bonuses, professional fees, utilities, sales and use taxes, and other operating obligations. Customer deposits and deferred revenue should be separately supported where relevant. The goal is to show how liabilities and related cutoffs were determined—not to advocate for their inclusion or exclusion from a transaction calculation.

Explain seasonality and unusual movements

A historical schedule is more useful when material changes can be explained. Consider whether fluctuations arose from seasonality, growth, customer billing patterns, purchasing cycles, vendor terms, supply constraints, a system conversion, or an accounting correction.

Prepare short, factual explanations tied to the underlying records. Distinguish recurring business patterns from isolated events, but avoid unsupported adjustments or descriptions designed primarily to improve the presentation. Any transaction-related interpretation should be developed with the seller’s appropriate advisers.

Create a controlled support package

Maintain one controlled version of the working-capital schedule. It should identify:

• The reporting periods and preparation date.
• The ledger accounts included in each category.
• The source reports used and material reconciling items.
• Relevant accounting-policy or system changes.
• The person responsible for preparation and management review.
• Changes made after the schedule was first circulated.

Supporting documents may include aging reports, inventory records, vendor statements, bank reconciliations, account analyses, invoices, receipts, and payment records. IRS Publication 583 likewise emphasizes maintaining orderly supporting documentation for business transactions.

Coordinate accounting, transaction, tax, and legal responsibilities

Management remains responsible for the company’s books, records, estimates, representations, and decisions. Seller-side accounting support can help organize financial information, reconcile schedules, and prepare factual responses for the company and its advisers.

The transaction’s working-capital definition, target, adjustment mechanism, and legal effect are matters for the parties and their legal and transaction advisers. John W. Halloran CPA, P.C. does not value the business, advise a buyer, identify buyers, market the company, negotiate transaction terms, draft legal documents, or execute the sale.

Tax coordination may also be necessary. For certain asset sales, both seller and purchaser may have reporting obligations on IRS Form 8594. The company should involve its tax and legal advisers early; organizing asset and accounting records does not determine the transaction’s allocation or legal structure.

Owners preparing for a possible sale can review our Transaction Advisory services, our guide to preparing company financials for a future sale, and the focused discussion of supporting potential normalized EBITDA items. To discuss seller-side financial preparation, tell us about your business.

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