Over the past several weeks, we’ve been covering liquidity, buyer readiness, and the deal process from LOI to close. Today I want to go deep on a specific piece of deal architecture that I’m seeing become more important than ever: working capital.

Before we jump in: two conferences coming up over the next few weeks. If you’re attending either one, I’d love to connect.

UPenn Wharton ETA Conference Happy hour on 4/2, full conference 4/3 (Philadelphia, PA)

SMBash April 22–24 (Dallas, TX)

Some of the best conversations I’ve had about deal structure and lender strategy have happened over a drink at these events rather than on a Zoom call. If you’re there, come find me.

A Strong First Quarter

We launched two new tools that will help you analyze acquisitions:

• Analyze the working capital needs of a business by uploading a CIM or financial statements. Check out Working Capital Analyzer​
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• Model your acquisition and view the capital structure, distribution waterfalls, and investor returns in one view. Check out Search Fund Model​

It’s been a productive Q1 at Pioneer Capital Advisory. We’ve recently helped close several exciting deals, including a wire harness manufacturing business, a printers and copiers business, and a handful of others across a range of industries.

The good news: banks are still actively lending. Capital is available for well-structured SBA 7(a) acquisitions.

But here’s what I’m seeing shift: the SBA landscape is actively evolving from a risk profile perspective. Lenders are paying closer attention to deal capitalization, post-close liquidity, buyer experience, and most of all, whether the business will have enough working capital on day one to operate without distress.

Which brings me to today’s topic.

Working Capital: Why It Matters More Than Ever

If there’s one area where I’m seeing lenders apply increasing scrutiny, it’s working capital.

At its most basic level, working capital is the difference between a business’s current assets (cash, accounts receivable, inventory, prepaid expenses) and its current liabilities (accounts payable, accrued expenses, deferred revenue, other short-term obligations). It measures whether the business can cover its near-term operating obligations.

Positive net working capital means the business has a cushion. Thin or negative working capital means the business is operating hand-to-mouth, and that’s a risk factor banks are increasingly unwilling to ignore.

Here’s what banks want to see: on the day the keys change hands, the business has enough liquidity to operate, cover its near-term obligations, manage the inevitable transition bumps, and service its new debt. When a deal doesn’t account for working capital adequately, it raises red flags. And increasingly, it kills deals outright.

The question I hear most from buyers is: “Okay, but how do I actually get working capital into my deal?”

In the SBA 7(a) world, there are three primary ways. Let me walk through each one.

1. Working Capital Included in the Purchase Price

The most straightforward approach. The buyer and seller agree on a specific amount of working capital that will remain in the business at closing, and that amount gets baked into the total purchase price. It’s clean. It’s simple. But it requires alignment on what “adequate” working capital actually looks like, and that conversation can get nuanced, especially in asset-heavy or seasonal businesses where working capital needs fluctuate month to month.

2. Permanent Working Capital in the SBA 7(a) Loan

The SBA 7(a) program allows permanent working capital to be financed directly into the loan alongside the acquisition itself. One loan, one payment, one interest rate. The lump sum of cash lands in the business operating account at closing.

The key word is permanent. This is a one-time infusion meant to provide an ongoing base level of liquidity, not a revolving facility you draw on and repay.

3. SBA Express Line of Credit

Think of this as your safety net. An SBA Express Line of Credit is a revolving facility, separate from the term loan, that you draw on when you need short-term liquidity; a slow receivables month, an unexpected equipment repair, a large upfront materials purchase, and pay back when cash flow allows. You only pay interest on what you actually draw. SBA Express lines can go up to $500,000 and are typically structured with interest-only payments during the draw period.

This is important: Always pursue the line of credit at the time you close on the acquisition. Here’s why: once your SBA lender finances the purchase of the business, they hold a first lien on all business assets. If you close without a line of credit and later realize you need one, you’ll find it’s next to impossible to obtain an unsecured line from another institution. If you do find one, you’ll be paying an egregious interest rate. The window to secure a line of credit on favorable terms is at the closing table. Miss it, and you may not get another shot.

In many deals, I recommend a combination, permanent working capital financed into the loan and a revolving line of credit at closing. The right mix depends on the business, the industry, and the cash conversion cycle.

Which brings me to the most important point of this entire newsletter.

Not All Working Capital Is Created Equal

This is where I see most first-time buyers make a critical mistake.

They think of working capital as a single number. Some generic rule of thumb: “you need 10% of revenue."

But working capital needs vary dramatically depending on the business you’re buying. A commercial HVAC company, a property management firm, and a SaaS business all have fundamentally different balance sheet profiles. The amount of working capital they need, and the type of working capital they need, looks completely different.

Let me break this down with three examples I see regularly in our deal flow.

Commercial HVAC Company

If you’ve read recent editions of this newsletter, you know I like to use commercial HVAC as a case study. There’s a reason: it’s one of the most working-capital-intensive businesses you’ll encounter in the lower middle market.

Here’s why. Commercial HVAC companies carry significant accounts receivable because commercial projects are billed on net-30 to net-60 terms. Municipal and government contracts can stretch to net-90. They carry meaningful inventory: units, compressors, refrigerants, ductwork, parts. And they have substantial accounts payable to equipment distributors and supply houses.

The cash conversion cycle on a commercial HVAC business can easily be 60–90+ days. You’re buying materials, paying your technicians, and completing the work before you ever see a dollar from the customer. If you close on this business without sufficient working capital, you may find yourself unable to take on new commercial projects: or worse, unable to make payroll during a slow receivables period.

There’s also seasonality. Summer cooling season drives revenue spikes. Winter can be slow unless the business has a strong maintenance contract base. That seasonality creates cash flow peaks and valleys that your working capital needs to absorb.

What I recommend: For commercial HVAC, I typically want to see permanent working capital in the SBA loan plus a line of credit. The permanent WC gives you a base of cash and supports the inventory and receivables cycle. The line of credit gives you flexibility to handle the seasonality and the long collection cycles on commercial jobs. If the business does significant project work (as opposed to just maintenance contracts), you may need a working capital peg of 12–18% of revenue. Maintenance-heavy HVAC businesses can sometimes work with 8–12% because the recurring revenue is more predictable.

Property Management Company

A property management company is a completely different animal.

The core business model: manage residential or commercial properties on behalf of owners in exchange for a management fee, typically a percentage of rent collected. The company collects rent from tenants (often on the 1st of the month), takes its management fee off the top, and remits the balance to the property owner.

This is an asset-light, receivables-light business. There’s no inventory to speak of. Accounts receivable are low because management fees are netted from rent collected, very short collection cycle, often same-month. Accounts payable are primarily payroll for property managers, office overhead, and software subscriptions.

Because the cash conversion cycle is so short and there’s no inventory, working capital needs are structurally much lower than a company like commercial HVAC. The primary need here is operational cash; enough to cover 2–3 months of payroll, insurance, office lease, and software costs in case of a property owner contract loss or a temporary vacancy spike.

What I recommend: A working capital peg of 3–6% of revenue is often sufficient. I still recommend a line of credit at closing, because the risk in property management isn’t a long receivables cycle, it’s concentration. If your largest property owner pulls their contract, you need a bridge. But the permanent working capital financed into the SBA loan can be relatively lean.

SaaS Company

SaaS presents a working capital dynamic that confuses a lot of buyers and lenders alike.

At first glance, it looks like SaaS should have minimal working capital needs: no inventory, predictable recurring revenue, high gross margins. And in many ways, that’s true. But here’s the nuance that catches people off guard: deferred revenue.

If a SaaS business collects annual subscriptions upfront, that cash hits the bank account immediately, but it shows up as deferred revenue (a current liability) on the balance sheet because the service hasn’t been fully delivered yet. This means a SaaS company can be sitting on a healthy cash balance but report negative or very low net working capital because of the deferred revenue liability.

From a lender’s perspective, that deferred revenue represents an obligation to deliver service. If the business fails to deliver, customers could demand refunds. A lender looking at the balance sheet sees negative NWC and gets nervous.

But the operational reality is that the cash is already in the bank and the marginal cost to deliver the software for the remaining subscription period is near zero. The key is helping the lender understand this nuance, which is where a good loan broker earns their keep.

What I recommend: For SaaS acquisitions, I focus more on cash reserves than on a traditional NWC peg. The standard percentage-of-revenue benchmarks can be misleading because of the deferred revenue dynamic. What matters more is: how much cash does the business need to cover its monthly operating expenses, hosting, development team, customer support, sales, for 3–4 months if new sales stopped tomorrow? That’s your permanent working capital floor. A 4–8% peg is often appropriate, but the composition is almost entirely cash, not receivables or inventory.

The Comparison at a Glance

Here’s how these three businesses stack up on the key working capital dimensions:

Commercial HVAC: AR High | Inventory Mod–High | Deferred Rev. Minimal | Cash Cycle 60–90+ days | Seasonality High | LOC Critical | NWC Peg 12–18%

Property Mgmt: AR Low | Inventory None | Deferred Rev. Minimal | Cash Cycle 0–30 days | Seasonality Low | LOC Recommended | NWC Peg 3–6%

SaaS: AR Low–Med | Inventory None | Deferred Rev. Significant | Cash Cycle Negative to 30 | Seasonality Low | LOC Recommended | NWC Peg 4–8%

A one-size-fits-all approach to working capital is a recipe for either overpaying (tying up capital unnecessarily) or underfunding (running out of cash in month two). The right answer depends entirely on the business you’re buying.

If your lender or broker isn’t having this conversation with you in detail, that’s a red flag.

A Tool to Help You Get This Right

So how do you determine the right amount of working capital for the specific business you’re pursuing?

Until recently, modeling this out required a lot of manual spreadsheet work. I built a free tool that helps business buyers model both the revolving and permanent working capital they should be targeting. You plug in the details from the broker listing or the seller’s financials, and the tool analyzes the balance sheet and produces a recommendation tailored to that specific business.

Let me walk you through an example.

Example: Specialized Manufacturing Business

The tool starts by breaking down the business’s current assets and current liabilities, identifying which line items are included in net working capital per standard SBA treatment. Cash and the current portion of long-term debt are excluded - everything else rolls into the calculation.

In this example, the balance sheet shows $435K in accounts receivable (commercial customers on net terms), $150K in inventory (raw materials and work-in-process), and $300K in current liabilities - producing net working capital of $325,000.

The tool then produces a working capital purchase recommendation broken out by component:

Cash: $200,000 - 2+ months of operating expenses ($77K/mo payroll + overhead), to manage payment delays and fund material purchases for large projects.

Inventory: $150,000 - Specialized materials (carbide, stainless steel, exotic alloys) and work-in-process to support continuous operations and quick turnaround.

Accounts Receivable: $100,000 - ~30 days of revenue to handle standard payment terms and collection delays from industrial customers.

Total Recommended WC for Purchase: $450,000

Finally, the tool benchmarks the recommendation against standard NWC peg ranges as a percentage of revenue. This manufacturing business sits comfortably above the 5% peg ($174K target, $151K surplus) but falls short at 10% ($349K target, $24K shortfall) and 15% ($523K target, $198K shortfall).

Given the industry, specialized manufacturing with long cash conversion cycles, I’d want to see it pegged closer to 12–15% of revenue, which means negotiating additional working capital into the deal or financing permanent WC into the SBA loan.

This kind of analysis used to take hours. Now you can get it in minutes by plugging in the numbers from a broker listing or the seller’s financial package.

Try the tool here: https://acquisitionworkingcapital.com/​

Working capital isn’t the most glamorous part of a deal. But it’s often the variable that determines whether you’re operating from a position of strength in month one, or scrambling to find liquidity when something goes sideways.

Until next time,

Matthias Smith

President, Pioneer Capital Advisory

www.pioneercapitaladvisory.com

if you're working on an acquisition, or are in the pre-LOI phases, you can book a short, informal call here to meet our team and learn how we can help you.

For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call​

Already have a deal under LOI and need financing help: Schedule an LOI consultation​

Until next time,

Matthias Smith

President, Pioneer Capital Advisory

​www.pioneercapitaladvisory.com​
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Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

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