Buying a business in London, Ontario feels different from deals in Toronto or the U.S. Midwest. The scale is often mid-market, succession-driven, and tied to the pace of local customers, local lenders, and local suppliers. That reality shapes working capital needs more than most buyers expect. Miss the mark on net working capital, and the first quarter after close gets bumpy: payroll jitters, supplier friction, tight borrowing base, and a jittery lender. Get it right, and you sleep at night while integration work proceeds on schedule.
Working capital is not a theoretical concept in a purchase agreement. It is the oxygen that keeps the acquired company alive while you implement your plan. The task is to measure the true baseline, set a fair peg, and ensure the cash and credit capacity will cover trading cycles through seasonality, growth initiatives, and any operational changes you plan to make. This article is a field guide to doing that in London, grounded in the way deals are actually financed and run here.
Ground rules: what you are really measuring
Start with the definition the deal will use: current assets minus current liabilities, excluding cash and debt, and often excluding income taxes and one-off items. That is the functional net working capital. You are measuring the capital tied up in the day-to-day sales cycle: inventory you must carry to serve customers, receivables you extend to win and keep accounts, and payables you leverage with suppliers.
A common mistake is to take the most recent month, subtract liabilities from assets, and call it a day. That month might sit at the bottom of a seasonal trough or reflect an end-of-year push to collect. In Southwestern Ontario, with its construction suppliers, ag-adjacent distribution, auto parts, and HVAC contractors, seasonality and sector cycles matter. If you want the business to perform as represented, you must fund the same pattern of working capital that produced that performance.
London-specific context that shifts the numbers
I have seen three factors regularly move the working capital target in London deals.
- Seasonality is real. HVAC and building trades swing hard by quarter. So do certain distribution businesses tied to agricultural cycles or school-year demand. If you close in April, the next 90 days may be the hungriest working capital stretch of the year. Supplier terms vary with relationships. Family-owned operations often enjoy generous, trust-based terms with local suppliers. When ownership changes, terms sometimes tighten until new credit is established. You may need to plan for shorter payables in the first months post-close. Banking expectations are pragmatic but conservative. Local lenders want to see borrowing bases supported by quality receivables and well-managed inventory. They will haircut old receivables and specialty inventory. If you buy a company with sloppy AR follow-up or obsolete stock, do not expect the bank to finance it one-for-one.
A buyer who ignores these realities ends up backfilling with expensive equity or delaying growth plans. None of this is unsolvable, but it must be priced into the peg and the cash at close.
Start with a clean, normalized picture
Before you build a model, clean the data. Too often, the general ledger hides irregular items that distort working capital.
I ask for 24 to 36 months of monthly balance sheets, AR and AP agings with customer and vendor detail, perpetual inventory reports or at least inventory subledgers, and any seasonality notes the owner tracks. Match these to sales by month. Tie out to bank statements and tax filings where possible.
Then, scrub:
- Remove non-operating receivables. Shareholder loans or related-party amounts do not belong in the peg. Exclude customer deposits that are truly deferred revenue and matched by future obligations. If deposits are taken against custom work, verify how the WIP accounting flows, or you will understate required working capital. Identify obsolete or slow-moving inventory using an aging lens. If 20 percent of SKUs have not moved in 12 months, haircut them for valuation and for borrowing base purposes. That inventory still ties up cash, but the bank may not lend against it. Normalize payables. If the seller has been stretching vendors to 75 days while telling you standard terms are net 30, you cannot count on continuing that practice without cost. Suppliers notice ownership changes.
The goal is an operational working capital that reflects how the business needs to run under your stewardship, not how the seller squeezed the last few months.
How to set a fair working capital peg
The peg is the target working capital that the seller delivers at closing. Fall below the peg and you get a dollar-for-dollar price reduction; exceed it and the seller may receive a true-up. The art lies in selecting the right period and treatment of seasonality.
In London, a practical approach is to anchor the peg to an average of trailing twelve months by month, adjusted for known seasonality, outliers, and growth. If revenue is flat and the business is steady, a simple TTM average often works. When revenue is rising or falling, a weighted average or a run-rate method makes more sense. In construction-adjacent trades, I prefer to build a seasonality curve across three years to identify the typical peak working capital load and ensure the peg reflects that burden.
There is an edge case in fast-growing businesses. If revenue grew 20 percent year over year, but the seller was starved for working capital and ran backorders, the historical average understates what you need. In that case, calculate working capital as a percentage of next-quarter sales and align the peg with what the business would require to hit forecast revenue without stockouts or strained service levels.
Term negotiations matter. If the buyer will implement tighter credit control or vendor consolidation, you can model improved DSO or extended DPO, but do not double count. Lenders will push back on aggressive assumptions in the first 90 days.
The London twist: closing dates and seasonality
Closing in July for a landscaping supply distributor is not the same as closing in January. The July buyer inherits peak receivables and minimal cash as the business pushes volume. January brings lower working capital but also the risk of ramp-up cash needs within weeks.
I encourage buyers to time close for the month that balances operational transition with funding predictability. When timing is not flexible, shift the peg explicitly. For example, a buyer might agree to a peg equal to the average of the last three July month-end balances instead of the full TTM mean, with a seller note to support a portion of the swing if a cold spring delays sales. Sellers will negotiate, but both sides benefit from making seasonality explicit.
Receivables: more than a DSO number
Days Sales Outstanding is a useful signal, but it masks risk distribution. Ask for the top 20 customers by receivables balance and their payment history. In London, customer concentrations are common, especially in B2B trades. If two local manufacturers represent 35 percent of AR and one is known to slow-pay at fiscal year-end, you must plan cash buffers accordingly.
Walk the aging. Over-60-day receivables should be carved out or discounted in the peg. Test credit notes and write-off patterns by month. If bad debt expense was oddly low, there may be latent write-offs that appear after close.
A quick anecdote: a buyer acquired a precision machining firm with a headline DSO of 43 days. Post-close, the actual DSO blew out to 60 days. The culprit was a long-standing customer who demanded extended terms once the founder retired, citing the need to run-in the relationship. The buyer had to inject an extra 300,000 dollars while renegotiating pricing to offset the working capital drag. The lesson is simple: meet the top debtors during diligence, ask direct questions about terms under new ownership, and document in the purchase agreement any known concessions.
Inventory: carrying what customers expect to buy
Inventory disciplines differ by sector. In industrial distribution and service parts, customers expect breadth and immediate availability. In project-based trades, inventory might be work-in-process plus consumables. The right working capital depends on the promise the business makes to its customers.
In London, I often see legacy distributors with deep tail SKUs that move only a few times a year but are essential to keep key accounts loyal. If you slash that tail to free up cash, sales may hold up for a quarter, then slip as customers test your depth. This does not mean you must accept everything on the shelf. Instead, separate core SKUs, seasonal lines, and long-tail items, and align stock policies with customer commitments and supplier lead times. Build the inventory requirement from the SKU level for the top 80 percent of sales, then set a conservative policy for the rest.
Verify purchase commitments. The seller may have open POs arriving just after closing. Those goods will hit your cash and borrowing base. Include open POs in your forecast so the peg and immediate cash needs are realistic.
Finally, if you plan to change suppliers or consolidate warehouses, model the one-time build required to make the switch. A shift from regional suppliers to a single national vendor may lower unit costs but increase minimum order quantities and safety stock, which raises working capital for two or three cycles.
Payables: the lever that moves reluctantly
Sellers sometimes run long payables as a quiet source of financing. After the deal, vendors may insist on COD or strict net 30 until you establish your track record. That change can add hundreds of thousands of dollars to the near-term working capital requirement.
Call the top five suppliers. Ask how they will treat terms after a change of control. If you are financing with a chartered bank facility, offer to provide a comfort letter. Some vendors will hold terms if they believe the business is stable and funded. Others will not, especially if there were late payments in the past. Build your base case on conservative terms and treat any extensions as upside.
Building the 13-week cash flow that actually saves you
The gold standard for post-close liquidity is a 13-week cash flow, updated weekly by the controller. Before you close, assemble it. Use historical weekly cash patterns to seed the model, then layer your sales and purchasing plan. Include payroll cycles, HST remittances, and any scheduled term loan payments. London lenders who know you have this rhythm gain confidence, and it sharpens management’s focus for the handoff period.
I include three stress tests: a 10 percent sales shortfall, a 10-day slip in collections for the top three accounts, and a two-week delay in a key supplier delivery that forces expedited purchases elsewhere. If the business turns illiquid under any of those modest shocks, the deal is undercapitalized or the peg is too low.
Funding the gap: how much cash and what kind of debt
Working capital funding can come from three sources: cash at close, a revolving line secured by receivables and inventory, and vendor financing. In London, a typical mid-market deal might see a revolver sized at 60 to 75 percent of eligible AR and 30 to 50 percent of eligible inventory, with inventory eligibility haircut for slow-moving or specialty items. Revolver rates vary, but the structure matters more than the rate. Confirm eligibility criteria, concentration limits, and inventory appraisal requirements early.
For businesses with lumpy seasonality, I prefer to carry excess availability equal to at least one payroll plus a typical weekly AP run. If that number is 250,000 dollars, keep that buffer on day one. If the business is more volatile, raise the buffer. It is cheaper to lock in a slightly larger facility than to scramble for short-term fixes when a big customer slips payment by two weeks.
Vendor notes or holdbacks tied to the working capital true-up can help hedge uncertainty. A seller who is confident in the peg will often agree to a structured true-up after 60 to 90 days, when the first month-end under your ownership confirms the numbers. That mechanism prevents overfunding or underfunding working capital and aligns incentives.
Growth plans always cost working capital
Every growth initiative has a working capital shadow. Launch a new route, you fund fuel and receivables before you see cash. Add a new product line, you carry initial stock and endure learning-curve inefficiencies. Hire two sales reps, you extend more credit before collections catch up.
Model growth using the cash conversion cycle. If your current CCC is 55 days and you plan to add 2 million dollars of annual sales, the extra average working capital tied up could be roughly 300,000 dollars, give or take, depending on margin and payables. Plan to finance that, or you will temper growth right when momentum builds.
Legal mechanics that prevent surprises
Define working capital clearly in the purchase agreement. Spell out inclusions and exclusions, the accounting policies to be applied, and the process for the closing statement and true-up. Attach an exhibit with a sample calculation using an actual historical month. Ambiguity is the enemy of a smooth close.
Agree on who gets the benefit or burden of specific items: customer deposits, rebates receivable, accrued bonuses, warranty accruals, and HST. In Canada, HST treatment needs attention to avoid a cash Find out more crunch when remittances come due shortly after close.
Set dispute resolution timelines that reflect reality. Most post-close disagreements here are about inventory valuation and receivable collectability. Provide for a neutral accountant if the parties cannot agree within 30 days.
Practical diligence steps that pay off
Here is a succinct checklist I use to keep teams focused during diligence:
- Build a 24 to 36 month monthly working capital bridge, then graph the trend against monthly sales to visualize seasonality and growth effects. Conduct customer and supplier calls focused strictly on terms, remittance behavior, and any expected changes post-close. Document every commitment. Age inventory and physically sample-count high-value and slow-moving items. Reconcile the count to the general ledger and investigate variances quickly. Map the 13-week cash flow and rehearse the first four weeks with the incumbent controller or bookkeeper to confirm timing on cash ins and outs. Align lender eligibility and appraisal assumptions with your model, then layer in a buffer for ineligibles and concentration limits.
That list looks simple, but executing it rigorously reduces the probability of cash surprises more than any other single effort in the deal.
Where a local broker adds leverage
A seasoned business broker in London can help you find and interpret the working capital signals that do not show up in the spreadsheets. They know which suppliers tighten terms after a change of control, which customers tend to push payments at quarter-end, and how local lenders view certain inventory categories. If you prefer to access opportunities before they are broadly marketed, a firm that curates off market business for sale - liquidsunset.ca can also arrange direct conversations with owners, where you can ask practical questions about cash cycles without spooking the process.
If you are scanning businesses for sale London Ontario - liquidsunset.ca and zeroing in on a target, involve your banker and your advisor early. A business broker London Ontario - liquidsunset.ca with a live pulse on the market will help shape a peg that works for both sides. For owners preparing to sell a business London Ontario - liquidsunset.ca, cleaning up AR policies and rationalizing inventory six to nine months before listing can increase enterprise value and reduce friction in the true-up. For buyers aiming to buy a business London Ontario - liquidsunset.ca and hit the ground running, insisting on clean monthly data and a shared definition of working capital can keep the acquisition on rails.
Firms like liquid sunset business brokers - liquidsunset.ca bridge the gap between buyer expectations and seller realities. They see patterns across deals and can flag when a peg looks light for the season, or when a seller’s receivable concentration needs a special holdback. That nuance saves time and prevents post-close disputes.
Edge cases to watch
Asset-light service businesses can still have painful working capital needs if revenue is milestone-based and customers pay only on completion. A digital marketing firm with 45-day client terms and biweekly payroll can burn cash faster than expected if project sign-offs slip.
Conversely, cash-and-carry retail businesses might require less net working capital but carry seasonality risk in inventory. The risk is not the level of working capital, it is the volatility, and whether your facility and cash buffer can absorb it.
Another edge case arises when the seller mixes personal and business payables. Unwinding that intermingling post-close can cause one-time cash demands. During diligence, scrutinize vendor lists for non-business items and verify recurring payments.
Finally, watch warranty liabilities. Manufacturers and installers that promise long warranties need appropriate accruals. If the accrual is light, future claims will hit cash.
Bringing it together on closing day
By the time you sign, you should know three numbers cold: the agreed peg, the day-one borrowing base under your lender’s formula, and the minimum cash buffer that protects payroll and supplier relationships through the first quarter. If any of those numbers feels shaky, do not paper over the gap. Adjust the price, structure a temporary seller-supported cushion, or push closing by two weeks to get clarity.
The rhythm after close will validate your preparation. The controller will run the 13-week cash flow every Friday. Sales will share expected large invoices and delivery timing. Purchasing will map inbound inventory against credit limits and cash availability. The first month-end will produce the closing statement and the true-up. If the peg was well set, that process feels routine, not adversarial.
Working capital is not a one-time hurdle. It is the bloodstream of the company you are about to own. In London, where relationships run deep and the market rewards consistency, you will earn trust by paying suppliers on time, communicating with customers about terms, and keeping the shelves stocked with what they actually buy. Price that into your deal, and you will have the luxury of focusing on growth rather than firefighting.
If you want a sounding board as you evaluate working capital in a specific London acquisition, talk to your lender and a local advisor early, and lean on market operators who have seen the movie before. If you prefer to explore quieter opportunities, off market business for sale - liquidsunset.ca can create room for a calmer, more thorough diligence process, which is exactly what working capital assessment requires.