Negative working capital occurs when a company's existing liabilities exceed its current assets. This means that liabilities paid within a year exceed monetizable working capital over the same period.
Buyers often view a target company's negative working capital as negative because it represents the additional capital needed to operate the company after closing.
A buyer wants a working capital ratio of 1 to 1.5, which indicates at least $1 in current assets for every $1 in current liabilities. This gives the buyer confidence that the company can make enough money in the short term to meet the seller’s and payroll obligations.