One of the biggest blind spots I see in small-business acquisitions isn't revenue, margins, or even cash flow. It's net working capital. More specifically, its trend.
If the seller's NWC has been drifting downward over the last 12–24 months (A/R shrinking, inventory drawn down, A/P stretched), that's not just a bookkeeping curiosity. That's liquidity leaving the business.
And here's the kicker: If you only look at the most recent balance sheet, you're negotiating from a disadvantage. The seller may be handing you a business that can't actually operate on the NWC you're inheriting.
Don't become the buyer with:
- No cushion for payroll
- No funds for inventory reorders
- Payables stacked up like Jenga blocks
- And a seller who just "optimized cash" on the way out the door
The fix
Use a normalized 12-month average to set the NWC peg. Not a point-in-time number. Not the oddly low quarter the seller wants you to use. The real working capital required to run the business without disruption.
If NWC is trending down, don't ignore it. It's data. It's leverage. And it's your early warning that the business may need more cash than the seller wants to admit.