Michael Levison

If you’re like most business owners, you’ve spent years sweating over growth, margins, and customers—but probably not over working capital adjustments. And why would you? The phrase alone sounds like something only your accountant should worry about. Yet, when it comes time to sell your business, this little clause in the purchase agreement can mean hundreds of thousands—or even millions—swept off the closing check. I’ve seen it time and again: owners focus on the headline multiple and walk into due diligence only to discover that the real battleground is buried in the fine print. Let’s unpack how this works, why it catches so many sellers off guard, and what you can do to protect yourself. What Is a Working Capital Adjustment? In plain English, working capital is your short-term financial plumbing: receivables, payables, and inventory. Buyers expect that when they purchase your business, it will come with enough “plumbing” to keep water flowing on day one. When you sell your business “cash-free, debt-free,” that doesn’t mean you get to scoop up all the receivables and inventory on your way out the door. Buyers want a normal level of working capital delivered with the business. This is often referred to as the working capital peg.  The peg is essentially a target: the agreed-upon amount of working capital that will be in the business at closing. If actual working capital falls short of the peg, the purchase price gets reduced. If it’s higher, you may actually pocket a little more (though in practice, buyers structure things conservatively to avoid paying extra). Most owners don’t fully understand this concept until late in diligence. And by then, their leverage is shrinking. A common reaction is…“Wait a minute—I’ve already collected my receivables before closing. Why am I getting dinged for not leaving more working capital behind?” From the seller’s point of view, it feels like paying twice. From the buyer’s standpoint, it’s simply ensuring they don’t have to inject more cash on day one. Cash accounting adds fuel to the fire. Because revenues and expenses are recorded when money changes hands—not when they’re earned or incurred—cash-basis statements often disguise timing mismatches. That makes it harder to see the true level of working capital, which leads to bigger surprises when the buyer’s accountants “normalize” the numbers. How the Peg Gets Calculated Most deals set the peg using a trailing twelve-month average of working capital. Simple enough on paper, but messy in practice. Seasonal businesses (retail, agriculture, HVAC contractors) often get tripped up because the peg doesn’t reflect the ebb and flow of busy versus slow months.  High-growth companies can be penalized when historical averages don’t keep pace with today’s higher requirements.  Distribution and project-based businesses tend to have lumpier inventory or receivables, which make defining “normal” even more contentious. Buyers, of course, prefer conservative assumptions—because it protects them. Sellers often feel squeezed because the formula doesn’t reflect the actual rhythm of the business. The Real Impact on Value Let’s take a look at how this might play out.   Suppose you’ve agreed to sell your company for $20 million. You assume you’ll walk away with, well, $20 million. But the purchase agreement sets a $3 million peg. At closing, actual working capital comes in at $2 million. Suddenly, you’re looking at $19 million instead of $20 million. One million dollars evaporates—not because of EBITDA, not because of the multiple, but because of the mechanics. For many business owners, that could be the equivalent of years of distributions gone in a blink. And remember: buyers don’t see this as a “takeaway.” They see it as protecting themselves from having to inject liquidity immediately after the deal. How to Get Ahead of It A little foresight saves a lot of headache.  Work with your advisor to form a view on the issue early. Don’t wait until the purchase agreement. A good advisor should be able to help you with all of these things. Working capital adjustments rarely make the headlines of a deal. But for the business owner about to sell a business, they can have an outsized effect on the final check you take home. Prepare, plan, and get expert help. Whether you call it business consulting services or seasoned deal-making, this is one of those times when professional guidance pays for itself.

When it comes time to sell your business, there’s one detail that can quietly sabotage the deal—or at least the price you hoped to get. It’s not your revenue. It’s not your growth story. It’s your accounting method.Many small and medium-sized business owners manage their financials using the cash method of accounting. It’s simple, intuitive, and easier to manage for tax purposes. But when it comes to selling the business—and getting top dollar—the cash method can create challenges, because it often fails to reflect the economic reality of your business. Cash vs. Accrual: A Quick RefresherHere’s the core difference: At first glance, the difference may seem academic. But when a buyer evaluates your company, they’re not just looking at your bank balance. They’re trying to understand how your business actually performs over time and that’s where cash accounting can create distortions.As an example, I once worked with a professional services firm doing $3.8 million in annual revenue. On paper, their cash-based financials showed strong profits—especially in Q2 and Q4. But when the buyer’s CPA dug into the details, they discovered the company was pre-billing clients for future work (and recognizing it as revenue) and but delaying payment to contractors until later period when the work was actually done. The result was that profits were artificially boosted in some periods and depressed in others. After restating the financials on an accrual basis, EBITDA came in 18% lower than originally presented. The buyer adjusted their offer downward—and restructured it to include an earnout. The deal eventually closed, but the seller left money on the table and endured months of renegotiation and risk. Why the Timing Mismatch Matters Cash accounting does not always conform to one of the most basic principles of financial reporting: matching revenues with the expenses that generated them. Here’s how this mismatch can play out: These mismatches can make your company appear erratic or unpredictable to a potential buyer, even if your operations are steady. Impact on Business Valuation Buyers typically value businesses based on metrics like EBITDA (or Seller Discretionary Earnings), revenue trends, and working capital. These indicators are highly dependent on timing. When your financials are prepared on a cash basis: If you don’t address these issues up front, it is likely that the buyers will. A cash-accounting business will often necessitate a formal QoE study—either commissioned by the seller to preempt buyer concerns, or by the buyer as a condition of proceeding. That delays the process, increases transaction costs, and heightens the risk that the deal falls apart during diligence. The bottom line….cash accounting muddies the waters. Accrual accounting brings clarity—and with it, buyer confidence. What Buyers Want (and Expect) Serious buyers—particularly private equity groups or strategic acquirers—expect accrual-based financials. It’s the standard in due diligence. If you’re operating on a cash basis, you should anticipate: An experienced business broker or advisor can help you navigate this process—but they can’t change the underlying reality of your numbers. Making the Transition If your business currently uses cash accounting, shifting to accrual doesn’t have to be overwhelming—but it does require planning and the knowledge of a good CPA. The first step is to identify key accrual elements such as accounts receivable, accounts payable, deferred revenue, and prepaid expenses. From there, you’ll want to generate accrual-adjusted financial statements for at least the past two to three years. It may also be helpful to invest in accounting software that supports accrual tracking if you don’t already use one. Finally, consider whether a sell-side quality of earnings report makes sense as part of your preparation—it can strengthen buyer confidence, streamline diligence, and put you in control of the narrative. Getting these pieces in place early will save time, reduce surprises, and help you present a clear, credible financial story when it matters most.

When a business changes hands, contracts don’t automatically come along for the ride. For owners planning an exit, overlooking this reality can derail a deal—or significantly diminish its value. As an example, the owner of a Southeastern packaging company that I know lost a $4.8 million sale after its largest customer—accounting for 38% of annual revenue—refused to consent to a contract assignment. The buyer walked. Six months later, the business finally sold for $3.9 million to a different buyer under less favorable terms. The seller called it a “million-dollar lesson in fine print.” This situation isn’t rare. Many small and mid-sized business owners are unaware that contracts—leases, service agreements, supplier deals, IP licenses, and even customer relationships—may not transfer to a buyer without explicit consent. And if you’re selling the business via an asset sale, as most small businesses do, the risk is even higher. Why Contracts Don’t Automatically Transfer There are two primary ways to sell a business: an asset sale or a stock (or equity) sale.  The Legal Language That Matters At the heart of the issue are two types of provisions: 1. Assignment Clauses: These determine whether a contract can be transferred. Many contracts prohibit assignment without written consent. Some are silent, but even then, courts in many states may still require consent for contracts involving personal services or unique performance. 2. Change-of-Control Clauses: Even in a stock sale, some contracts treat a change in ownership as grounds to terminate the agreement unless prior approval is obtained. Facility leases can be particularly problematic.  A restaurant group that I know of attempted to sell two locations as part of a broader exit strategy. The buyer loved the numbers—but balked after seeing that both leases required landlord approval for any assignment. One landlord approved; the other did not. The buyer demanded a $200,000 discount, citing the risk of losing the site. The seller, cornered by timing, accepted. Action Plan: How Owners Can Prepare Most of the risk around contract transferability can be mitigated—if addressed early. Here are some steps you can take: In the sale of a business, every contract is a potential asset—or liability. By proactively reviewing and managing your agreements, you’re not just making your business more attractive to buyers—you’re preserving its value. Ignore this, and you might end up negotiating with your landlord, lawyer, and largest customer at the 11th hour. Handle it early, and your contracts will work for you, not against you.

Ready to assess your due diligence readiness? Submit Form to access our Free Due Diligence Checklist Note:  This is the last of a seven part series that addresses the key questions that you, as a business owner, need to really focus on as you begin to think about the sale of your business.  This series will give you actionable insights on assessing your readiness to sell, what you need to do to be prepared for the process and what real success will look like post sale.  Happy reading! Successfully selling a business has several phases.  One particularly important phase, which is often underestimated in its complexity and impact is the due diligence process. Before an offer is finalized, potential buyers will meticulously review your business to confirm its financial health, legal standing, and operational stability. Here’s how to ensure you’re prepared for a comprehensive due diligence review. Business and Financial Projections Your financial projections are more than just numbers—they are the blueprint for your company’s future. Buyers will scrutinize these projections to assess the reliability of your growth assumptions. Providing a well-structured financial forecast that clearly articulates key assumptions not only builds credibility but also helps mitigate buyer skepticism. Accounting and Quality of Earnings When it comes to due diligence, up-to-date financials are really important. Ideally, these financial statements should be prepared or reviewed by an external accountant to ensure accuracy and transparency. If you are planning to sell in the next couple of years, you may want to consider starting to produce interim (at least quarterly) financial statements.  Updated performance will be important to prospective buyers if the last published financials are more than 3 months old. Additionally, for businesses with complex financials or those seeking to maximize sale value, a sell-side Quality of Earnings (QoE) report can be a powerful tool. This report, commissioned by the seller, provides a buyer’s perspective on the financials, verifying that revenue and profit figures are sustainable and free from anomalies. By proactively addressing potential concerns, a sell-side QoE can reduce the likelihood of renegotiations and help maintain deal momentum. Tax Liabilities and Compliance Unresolved tax liabilities can derail a deal. Buyers will be keen to understand your tax history, current obligations, and any pending issues. A clean tax record helps to foster trust and streamline negotiations. Employment Practices and HR This is perhaps the area of greatest deficiency I see in businesses as they approach the sales process..  Employment practices can reveal potential liabilities and operational risks. Buyers will want to review contracts, compensation agreements, and key employee arrangements. Addressing HR-related risks upfront can prevent unpleasant surprises during due diligence. Insurance Coverage Buyers will want to ensure that all assets and liabilities are adequately covered by insurance. Uncovering gaps in coverage can lead to unexpected costs post-transaction. Updating insurance policies and documenting all coverage areas can reinforce buyer confidence. Technology and Intellectual Property Intellectual property and technology assets can be significant value drivers—or liabilities—depending on how well they’re managed. Ensuring strong protection of intellectual property and maintaining updated technology agreements are often overlooked steps in due diligence preparation. The due diligence process is not just about presenting financial statements—it’s about demonstrating operational readiness and minimizing perceived risks. By proactively addressing these key areas, you can present a well-prepared business that instills confidence in potential buyers.

If you’re a business owner considering a sale in the next few years, you’re not alone. Over 60% of the 15 million privately held businesses in the U.S. are owned by Baby Boomers, and more than 75% of them expect to sell in the next decade. That coming wave of owners heading for the exits—the “Silver Tsunami”—is going to reshape the market in ways that reward the prepared and punish those that are not. Unfortunately, preparation is the exception, not the rule. According to the Exit Planning Institute’s 2023 National Report, 75% of business owners who sell their company express profound regret within 12 months of the sale. Why? Because the business wasn’t worth what they thought, the sales process was mishandled, or they weren’t personally ready for the transition. The Future Market Will Be Tougher As more businesses flood the market, buyers will become choosier. Only the best-run, lowest-risk companies will command premium valuations. That means if you want to secure a high-value exit—one that rewards your years of effort—you’ll need to start preparing now. In fact, most successful exits begin 1–3 years before the business goes to market. Three Essential Questions to Answer Early Before you think about selling, make sure you can answer these three questions: Eight Drivers of Enterprise Value One of the most powerful tools available to business owners is the Value Builder Score, a system that evaluates your business on eight statistically proven drivers of enterprise value. These include: After analyzing over 80,000 businesses, data shows that companies with a Value Builder Score of 90+ receive offers that are 2x higher—on average—than companies scoring in the 50s and 60s. That difference can mean millions in added value for your exit. This table summarizes the correlation between the Value Builder Score and EBITDA multiple.  The results are crystal clear….these 8 drivers of value will either create or kill value in your business. Click here to get the Value Builder Score for your company Positioning for the Likely Buyer Profile Strategic and financial buyers look for different things, but both want clean, low-risk opportunities. To get there: Competition Drives Value Finally, when it’s time to sell, don’t fall into the trap of negotiating with just one buyer. A competitive process—one that includes multiple, qualified buyers—leads to stronger offers, better deal terms, and fewer surprises during diligence. Create a structured, auction-style process that limits exclusivity and shortens timelines.  This often involves a good bit more work and effort than listing the business on various buy/sell platforms, but it is worth it. Finally, assemble your team of advisors early.  This team should include a business broker/investment banker, accountant, a transaction attorney, and wealth advisor.  All of these issues are somewhat inter-related and you will want everyone on the same page before you start the sales price. Want to Learn More? Watch our on-demand webinar: Your Business / Your Payday: The Road to a High-Value Exit We’ll dig deeper into what drives business value, how to avoid post-sale regret, and what you can do now to ensure the future you want.

As Baby Boomer business owners approach retirement, the business-for-sale market is undergoing a seismic shift. Approximately 60% of the 15 million privately held businesses in the U.S. are owned by Baby Boomers, and many of these owners are now preparing to exit. This “silver tsunami” of retirements will create an unprecedented wave of businesses entering the market. This will create great buying opportunities for younger generations; however, this surge presents significant challenges for sellers.  For owners who plan to sell, this creates a critical reality: only well-prepared and well-run businesses are likely to thrive in a crowded marketplace. If you’re considering selling your business, understanding the challenges ahead and starting the planning process early are essential steps to achieving a successful sale. Challenges for Business Owners in a Saturated Market Early Planning Is Key Selling a business is more than a transaction, it is a strategy. It requires careful preparation across multiple areas to ensure you maximize value and stand out in a crowded market. Here’s where your planning should focus: 1. Financial Health and Transparency Buyers want to see clean, accurate financials that reflect the true performance of the business. Start by: 2. Operational Excellence A business that runs efficiently without heavy reliance on the owner is more attractive to buyers. Focus on: 3. Customer and Revenue Diversification Buyers are cautious about businesses overly dependent on a few key customers or revenue streams. To reduce risk: 4. Legal and Regulatory Compliance Legal red flags can delay or derail a sale. Ensure: 5. Business Valuation and Market Position Understanding the value of your business is crucial. Start with: 6. Personal and Emotional Readiness The decision to sell is as personal as it is financial. Many sellers don’t take this issue seriously but it is really important.  Prepare by: 7. Building a Team of Advisors Selling a business is a team effort. Assemble experienced professionals to guide you, including: The wave of businesses for sale means buyers will have more choices than ever, but that doesn’t mean all businesses will sell. Those that stand out will be well-run, properly prepared, and able to demonstrate their value clearly to potential buyers. Early planning allows you to address weaknesses, showcase strengths, and position your business as a standout opportunity. Here Is A Great Place To Start A great place to start is to get a Value Builder Score (VBS) on your business.  The VBS, used by over 80,000 companies, is a statistically valid measure of your company’s ranking on 8 different drivers of enterprise value.  It will give you a clear roadmap of the areas that you should focus on to optimize your exit down the road.  For your free VBS, click on this link:  https://score.valuebuildersystem.com/value-acceleration-partners/michael-levison

Note:  This is the sixth part of an eight part series that addresses the key questions that you, as a business owner, need to really focus on as you begin to think about the sale of your business.  This series will give you actionable insights on assessing your readiness to sell, what you need to do to be prepared for the process and what real success will look like post sale.  Happy reading! For business owners preparing for an exit strategy, tax planning is one of the most crucial elements of a successful business sale. Without careful planning, you may well lose a significant portion of your sale price to capital gains taxes, ordinary income taxes, and depreciation recapture. Working with an experienced business broker or investment banker can help you structure the deal strategically to minimize taxes and maximize your net proceeds. Here’s what you need to know. Capital Gains Tax: The Difference Between Short- and Long-Term Gains When selling a business, the IRS applies either short-term or long-term capital gains tax rates, depending on how long you’ve held the assets: Strategy Tip: Holding assets for at least one year before selling can significantly reduce your tax burden. If you’re close to the one-year mark, delaying the sale could mean paying a lower tax rate. Business Sale Structure: Asset Sale vs. Stock Sale How you structure your business sale—asset sale vs. stock sale—affects both tax treatment and buyer interest. Strategy Tip: If a buyer insists on an asset sale, negotiate to allocate more value to goodwill and intangible assets, which qualify for capital gains treatment. Tax Deductions and Offsets to Reduce Your Tax Liability Proper planning allows business owners to use deductions and credits to offset taxable gains, including: ✔ Transaction Costs – Broker fees, legal fees, and advisory services may be deductible.✔ Net Operating Losses (NOLs) – Past business losses may offset capital gains.✔ Installment Sales – Spreading payments over time can reduce your tax bracket exposure. Strategy Tip: Work with a business broker and tax advisor to optimize deductions and identify tax-saving opportunities. Advanced Tax Strategies for Business Owners To further reduce your tax burden, consider these advanced strategies: ✔ Installment Sales – Accept payments over time to spread out tax liability.✔ Charitable Remainder Trusts (CRTs) – Donate part of the sale to reduce capital gains tax while creating ongoing income.✔ Qualified Small Business Stock (QSBS) Exclusion – If you own a C-Corp and meet IRS criteria, you may exclude up to 100% of capital gains on the sale. Planning Beyond the Sale: Wealth & Estate Considerations Your business exit strategy should align with your long-term financial goals. After a sale, consider: ✔ Estate Planning – How will your heirs be impacted by estate taxes?✔ Retirement Planning – Where will you invest proceeds for wealth preservation?✔ Tax-Advantaged Investments – Can you reinvest in Qualified Opportunity Zones to defer capital gains taxes? Strategy Tip: Include a wealth management professional as part of your deal team.  Don’t wait until after the deal is done. Work With an Expert to Maximize Your After-Tax Proceeds Selling a business isn’t just about finding a buyer—it’s about structuring the deal to protect your wealth. Working with an investment banker or experienced business broker ensures you negotiate the best deal while implementing tax-efficient strategies to keep more of your hard-earned money. 🔹 Thinking about selling your business? Click here to get your Value Builder Score to get actionable insight on strategies for increasing your business’s sale price before going to market.