Featured article by @redacted‌ and @redacted‌ This week, we’re going to be featuring a write-up by Heather Endresen of Viso Business Capital and Mark Dittrich, Groundswell Law. It’s closer look at net working capital and how people tend to approach it in the wrong way. If you’d like an even deeper dive into the specifics, I’d encourage you to check out this article of theirs as well. redacted The NWC problem When you buy a used car, your eyes go straight to a few numbers: price, mileage, MPG. You probably never check how much gas is in the tank. But imagine the fuel were worth 5–10% of the car’s value. Suddenly that gauge matters. When buyers negotiate a business, almost all the energy in the room goes to price and multiple. Net working capital (NWC) often gets treated as an afterthought, and that’s the number most buyers negotiate wrong. Ignoring it until closing is one of the most expensive mistakes a first-time acquirer can make. Here’s the problem in plain terms. Once a seller has decided to sell, the incentive to drain the business is real: collect the receivables, let inventory run down, push off the payables. Every dollar left in the account at closing can feel like a dollar walking out the door with the new owner instead of the seller. Get NWC wrong, and you can be profitable on paper while running out of cash to make payroll in month one. What NWC actually is NWC is the cash, receivables, and inventory (net of payables) that a business needs on hand to keep running without the new owner injecting extra capital just to make payroll or pay vendors. Current assets minus current liabilities is the textbook definition. The Viso Method frames it more simply: the business is supposed to come with a full tank of gas. The “full tank” is the working capital that lets the business run on day one. If your new car shows up on empty, you’re not driving anywhere. Instead, you’ll be scrambling for cash you thought you were buying. Both sides want a fair number: enough for the buyer to operate from day one, without the seller giving away value. That agreed number is the net working capital peg. The Viso method The peg is intentionally sized to the business’s cash conversion cycle: days of inventory, plus days waiting on receivables, multiplied by daily operating cost. A business that holds inventory 45 days and waits another 30 on receivables has a 75-day gap to fund before cash comes back around, and that gap is what the peg has to cover. Seasonality matters too. For example, take a Northeast landscaping company earning 40% of its revenue in one quarter. A buyer who closes in January walks into months of payroll with little cash coming in. For the peg to function properly, it has to reflect when the cash actually arrives, not a smoothed annual average. Get this wrong and the buyer is technically profitable while going broke in real life. The myth about the true-up The closing balance sheet will essentially never land on the peg. Receivables and inventory move every day. To settle the difference, deals use a true-up: about 60 to 90 days after closing, the buyer counts what was actually delivered against the peg. If the seller delivered more, the excess flows back to them; if less, they cover the shortfall. Rather than being a price renegotiation, it’s a measuring stick that makes sure the full tank you paid for is the tank you actually received. This is where one of the most persistent myths in SBA-financed acquisitions comes from: the belief that true-ups simply aren’t allowed. Deal after deal, buyer and seller would agree to a peg and true-up in good faith at the LOI stage, only for the bank’s SBA counsel to throw out the true-up language late in the process. In other words, this tells the seller the fairness mechanism was gone but the obligation to deliver working capital remained. Enough advisors watched that happen that the easier lesson became “never put working capital in the price.” The real issue was never whether a true-up is allowed. It’s that the language wasn’t drafted to survive bank counsel review. On top of that, nobody looped the lender in until it was too late to fix. That bad practice pushes buyers into the riskier structure: working capital left out of the price and funded (maybe) by the loan, at the bank’s discretion, where they can cut it late after months of exclusivity. How buyers and sellers protect themselves Keep working capital in the price. Don’t let an advisor talk you out of a normalized peg just because a true-up sounds complicated to draft. It’s the safer structure for you and the bank. Loop the lender in early. Get the peg and true-up mechanism in front of the bank during underwriting not at the closing table. Ask them to approve the true-up concept in the commitment letter, so there are no eleventh-hour surprises. Draft it to survive counsel review. The bank’s one real question is whether the structure could ever drop the buyer’s cash at risk below the required equity injection. Draft so the answer is structurally “no,” typically by treating excess working capital as an excluded asset, or capping the payment back to the seller. Where a quality of earnings comes in Buying a business is risky, and the working capital peg is exactly the kind of number you don’t want to guess at. A Quality of Earnings (QoE) report is where the peg gets pressure-tested against what’s really going on in the business: sizing it to the business’s actual cash conversion cycle and seasonality while verifying the receivables and inventory. A strong QoE and a well-built true-up work together: the QoE establishes the right number, and the true-up makes sure the buyer actually receives it. Done right, the two are a core part of what makes a deal both fundable and fair. The bottom line: A working capital true-up is not an SBA eligibility problem — it’s a drafting-and-timing problem. Sized correctly with a QofE, drafted to survive bank counsel, and put in front of the lender early, it’s one of the most powerful protections a buyer has. That sequence — right number, right language, right timing — is exactly what the Viso Method is built to manage. Ask how your true-up is drafted, not whether you’re allowed to have one. Lender - Heather - redacted Lawyer - Mark - redacted QoE provider - Caleb - redacted