One of the main reasons entrepreneurs want to buy an existing business is that they can hit the ground running with operations, employees, customers and revenue in place. Part of that strategy includes having enough money on hand at closing to pay for the typical expenses of the business for at least the first month or two, i.e., the “working capital”. Buyers want to know how much Seller typically spends on rent, vendors, employee salaries, supplies, insurance, software and any other products or services necessary to operate the business. Working capital is calculated by subtracting current assets from current liabilities on the company’s balance sheet. However, averaging the working capital over twelve months may not be wise, as certain months may be more cost-heavy than others. If for example, certain pricey license registrations come due every May and the closing is on May 1st, the buyer should make sure they have adequate funds to meet such expenses, in addition to the more normal monthly costs. Similarly, buyers should scrutinize monthly revenue trends in case there are months that are typically lower or higher in revenue throughout the year. You can imagine a perfect storm for a buyer wherein they set the working capital based on a twelve-month average and then close in an atypically low-revenue, high-cost month. Once the working capital target is set, buyer and seller should work together to determine what cash, accounts receivable and other liquid assets will remain in the business at closing to meet the target. If the buyer is concerned that there may be a shortfall, they should push to set up a purchase-price escrow account to fund the difference.