Definition
A working capital target is a specific amount of operating cash flow the buyer and seller agree must be left in the practice on the day the sale closes. Think of it like selling a car. You and the buyer agree it should be sold with half a tank of gas. The working capital target is that “half tank” for your practice.
This target is based on your practice’s historical financial performance, typically looking at an average over the last 12 months. It is not extra money on top of the sale price. Instead, it is a mechanism to ensure the business can pay its staff, rent, and medical suppliers immediately after the transaction without the new owner having to inject emergency cash.
If the actual working capital at closing is higher than the target, the buyer pays you the difference. If it’s lower, that amount is deducted from your sale proceeds.
Why This Matters to Healthcare Providers
The working capital target directly affects the final cash you receive from selling your practice. A miscalculation or misunderstanding of this target can lead to a surprising and significant reduction in your payment after the deal is already signed. Managing your billing, collections, and payables well in the months leading up to a sale is essential to meeting this target.
Example in Healthcare M&A
Scenario: An orthopedic group agrees to be acquired by a private equity firm. After reviewing the practice’s finances, both parties agree on a Net Working Capital target of $400,000, which is the historical average needed to run the practice smoothly. This target is written into the definitive purchase agreement.
Application: In the months before closing, the practice’s billing team does an excellent job, bringing in payments faster than usual. On the closing date, a final calculation shows the practice’s actual Net Working Capital is $450,000.
Outcome: Because the actual working capital was $50,000 above the agreed-upon target, the buyer adds $50,000 to the final payment made to the physician owners. Had the actual amount been $350,000, the sellers’ proceeds would have been reduced by $50,000.
Related Terms
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About the SovDoc M&A Glossary
Hand-curated by our deal-makers and analysts, the SovDoc glossary turns complex mergers-and-acquisitions jargon into clear, plain-English definitions.
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Frequently Asked Questions
What is a working capital target in the context of selling a healthcare practice?
A working capital target is a specific amount of operating cash flow that the buyer and seller agree must remain in the practice on the day the sale closes to ensure the business can pay its staff, rent, and suppliers immediately after the transaction.
How is the working capital target determined?
It is typically based on the practice’s historical financial performance, often calculated as an average over the last 12 months.
What happens if the actual working capital at closing is higher than the target?
If the actual working capital exceeds the target, the buyer pays the difference to the seller, effectively increasing the seller’s final payment.
What are the consequences of the actual working capital being lower than the agreed target at closing?
If the actual working capital is lower than the target, the difference is deducted from the seller’s proceeds, reducing the final amount of cash they receive from the sale.
Why is understanding and managing the working capital target crucial for healthcare providers selling their practice?
Misunderstanding or miscalculating the working capital target can lead to unexpected reductions in sale payment after the deal is signed. Proper management of billing, collections, and payables prior to sale is essential to meet the target and avoid financial surprises.