When you’re preparing to transition your veterinary practice—whether that transition happens next year or some time in the future—one financial concept may appear early, often, and sometimes unexpectedly: net working capital (or NWC).
For many practice owners, it’s a term they’ve heard, but not something they’ve ever had to calculate or interpret. And that makes sense. On a typical day, DVMs spend their time diagnosing, treating, and leading teams—not building liquidity models and mapping cash flow.
But buyers, consolidators, and private equity groups look at NWC as a real-time key indicator: How well does your practice function financially?
Contrast this with EBITDA—another financial concept to really get a handle on—which tells a buyer how profitable your practice is (on paper). Net working capital tells buyers how smoothly it runs in real life.
What is net working capital?
The formula for net working capital is simple, but it has significant implications.
Net Working Capital = Current Assets – Current Liabilities
It comes straight from your balance sheet. But each side of the equation matters.
Current assets typically include:
- Cash and cash equivalents
- Accounts receivable (client balances, insurance/TPA receivables)
- Inventory (pharmaceuticals, medical supplies, food, retail)
- Prepaid expenses (insurance, software, rent, etc.)
These are assets expected to be converted into cash—or consumed—within 12 months.
Current liabilities typically include:
- Accounts payable (suppliers, diagnostic labs, utilities)
- Accrued expenses (payroll, taxes, vacation pay)
- Short-term loans or lines of credit
- Current portion of long-term debt
These are obligations your practice must settle within the next 12 months.
A positive working capital ratio means you have more short-term assets than short-term debts. A negative working capital ratio means the opposite—and raises questions about liquidity and operational strain.
Why net working capital matters for transition planning
When buyers evaluate your practice, they don’t just assess your revenue and EBITDA multiple. They also look at whether the business has enough liquidity to operate smoothly after closing.
That’s where net working capital matters.
1. NWC signals financial stability.
Is the practice consistently able to pay suppliers on time?
Do receivables come in at a reasonable pace?
Is inventory under control?
A strong NWC gives a buyer confidence that they aren’t walking into a cash-stressed environment.
2. Buyers use NWC to determine the “working capital target.”
During a sale, the buyer and seller agree on a NWC target (often called a “peg”). At closing, the practice’s actual NWC is compared against this target.
- If actual NWC is higher: you may receive more on top of the purchase price.
- If actual NWC is lower: purchase price is typically adjusted downward.
Rule of thumb: this adjustment is often dollar-for-dollar.
3. NWC helps buyers forecast how much cash the practice needs post-close.
If a buyer believes the practice will require a sizeable cash injection just to operate normally, they’ll reflect that in the structure of the offer.
4. Clean NWC history reduces delays in diligence.
Receivables that don’t reconcile, outdated inventory, or unclear payables are some of the most common sources of friction in veterinary deals.
Getting ahead of those now saves weeks—and sometimes months—later.
Understanding the Components: What Counts (and Why)
Knowing the core NWC formula is one thing. Knowing how buyers interpret the inputs is another.
Accounts Receivable (AR):
Buyers look for:
- Timely collections
- Clean aging reports
- Low percentages of 60+ day balances
- Clear policies (e.g., deposits for surgeries, financing options)
If AR is inflated—perhaps due to old balances that were never really written off—it artificially boosts NWC. Buyers typically catch this quickly.
Inventory:
Buyers expect:
- Accurate counts
- No expired pharmaceuticals
- Normalized levels consistent with historical ordering patterns
Overstocking (particularly near a sale) is a red flag.
Prepaid Expenses:
These must be clearly documented so buyers understand what services you’ve already paid for versus what they will be responsible for after closing.
Accounts Payable (AP):
Buyers examine:
- How quickly you pay vendors
- Whether AP is artificially low (e.g., delaying payments to look more liquid)
- Whether any liabilities are understated or missing
Accrued Expenses:
This includes payroll accruals, PTO, taxes payable, bonuses, etc. Buyers expect full transparency here—and discrepancies often create last-minute tension.
How NWC affects your valuation and the LOI
Most practice owners expect the LOI to focus on:
- Purchase price
- EBITDA multiple
- Structure (cash, earnout, equity)
- Transition period
- Employment agreements
But in virtually every LOI, especially with corporate or private equity buyers, you’ll see a section called “Working Capital Adjustment,” “Net Working Capital Target,” or “Normalized Working Capital.”
This clause ensures the practice is delivered with enough liquidity to operate normally. Without it, a seller could technically empty operating accounts or let receivables age while still receiving full valuation—a risk buyers obviously won’t take.
How the adjustment works (in layman’s terms):
- Buyers analyze your last 12–24 months of NWC.
- They model a “normal” level required to keep your practice running.
- That becomes the NWC target in the LOI.
- At close, your actual NWC is compared to this target.
- The purchase price adjusts up or down accordingly.
This is why your NWC should be:
- Clean
- Consistent
- Supported by documentation
This is where working with an experienced practice advisor helps. They can help you set expectations and negotiate what “normal” ought to look like.
What healthy net working capital looks like
Every practice is different. Large multi-DVM clinics have different needs than smaller, appointment-only practices. But there are patterns.
Healthy NWC usually includes:
1. Strong, but not excessive, cash balances.
Buyers don’t expect you to keep unusually high amounts of cash in the business (i.e., remember, most deals are “cash-free, debt-free”), but they do expect enough liquidity for normal operations.
2. Clean receivables.
Old, uncollectible invoices should be written off.
Receivables >60 days should be minimal.
Payment processes should be clear and consistent.
3. Accurate, right-sized inventory.
Buyers rarely want “padding” in inventory. They want what the practice realistically needs.
4. Reasonable payables and accruals.
AP shouldn’t show signs of:
- Payment delays
- Understated vendor obligations
- Last-minute shifts to influence NWC
5. Predictable patterns month to month.
Most buyers care far more about consistency and trends than absolutes.
How to prepare your NWC before selling
A few proactive steps can dramatically improve your position in negotiations.
1. Review 12–24 months of NWC trends.
Why? Because buyers will. You’ll want to know the story your numbers tell.
2. Tighten accounts receivable.
- Require deposits for surgeries
- Offer third-party financing
- Follow up consistently
- Write off old/irrecoverable balances
3. Normalize inventory.
Clean out anything expired or obsolete. Don’t stockpile before a sale—buyers see it a mile away.
4. Clear up accounts payable.
Ensure all vendor obligations are recorded accurately.
Avoid unusual timing shifts.
5. Document everything.
Clean financials reduce buyer risk—and risk impacts valuation.
6. Work with your advisor early.
Your practice advisor will:
- Model what “normal” NWC looks like
- Defend your numbers during diligence
- Ensure the LOI’s NWC target is fair and accurate
This is one of the most overlooked—but most valuable—roles of a transition advisor.
Common Pitfalls (and How to Avoid Them)
Pitfall 1: Ignoring NWC until it’s too late
By then, the buyer has already formed an expectation.
The fix? Review it early and clean it up proactively.
Pitfall 2: Artificially manipulating NWC
Delaying payments or over-ordering supplies to appear more liquid will backfire.
The fix? Keep operations normal and well-documented.
Pitfall 3: Inconsistent AR policies
Uneven billing or shifting collection patterns worry buyers.
The fix? Standardize, automate, and review aging reports.
Pitfall 4: Poor documentation
If items in AR, AP, or inventory can’t be substantiated, buyers assume risk—and discount for it.
The fix? Maintain clean, organized backup.
The Takeaway
Net working capital isn’t something that should consume your day-to-day. But as you begin preparing for a transition—months or even years in advance—it becomes a critical part of your practice’s financial story.
A clear, consistent NWC profile:
- Makes your practice more attractive
- Reduces friction in diligence
- Minimizes purchase-price adjustments
- Builds buyer confidence
- Strengthens your negotiating position
- Supports a smoother, faster closing
If you’d like help reviewing your NWC or preparing your practice for a future transition, our team is here to walk through it with you. We’ve supported hundreds of owners through this exact step—helping you protect your value, your legacy, and your peace of mind. We’re ready to talk when you are.
