Very few businesses have steady and equal activity each month of the year. As such, it’s critically important to understand the seasonality of any business you may be buying. The obvious issue of course is the working capital requirements when you take over a business.
First, let’s define “Working Capital”. In accounting terms, it’s the company’s total current assets (i.e. cash, accounts receivable) less its current liabilities (payables). The only problem with this formula however is that in most small business purchases, the seller takes the receivables and pays off the payables at closing to deliver the business “free and clear”. Or, in numerous businesses, there may not be much in the way of current assets.