You’ve agreed on a purchase price. You’ve signed a letter of intent. Then your attorney sends over a working capital section in the deal terms and suddenly you’re in a conversation you weren’t expecting — about cash deposits, pre-paid tuition, and who gets the money sitting in your business account at closing. Welcome to the working capital discussion. It’s one of the most commonly misunderstood financial topics in a preschool sale, and one that can shift your effective net proceeds by tens of thousands of dollars if not clearly addressed in the purchase agreement.
What Is Working Capital in a Business Sale?
Working capital is the difference between a business’s current assets (cash, accounts receivable, pre-paid expenses) and its current liabilities (accounts payable, payroll obligations, vendor balances due). In a sale, the question of who gets the working capital — and how much should be included — needs to be explicitly addressed before closing.
For a childcare business, the most common working capital components are:
- Security deposits held from families
- Pre-paid tuition collected but not yet “earned” (families who pay a month in advance)
- Accounts receivable — tuition owed but not yet collected
- Accounts payable — bills owed to vendors or utilities at closing
- Payroll liabilities — earned wages not yet paid at closing
Security Deposits: A Common Closing Dispute
Security deposits are one of the most frequent working capital issues in childcare sales. When families enroll, they often pay $200–$500 that you’re obligated to return when they leave. At closing, these deposits typically transfer to the buyer as a liability — the buyer will owe the refunds — so they receive a credit for the total outstanding amount.
If you’re holding $12,000 in family security deposits at closing, the buyer receives a $12,000 credit (or you transfer $12,000 to an escrow account that becomes the buyer’s responsibility). If this isn’t addressed in the APA, you can end up in a tense dispute at the closing table. Address it early, in writing, and both parties know exactly what to expect.
Pre-Paid Tuition: Why Timing Matters
Many childcare programs collect tuition in advance — weekly, monthly, or even quarterly. If you collect tuition on the 1st of the month and the deal closes on the 15th, approximately two weeks of pre-paid tuition sits in your account representing services that will be delivered after closing — by the new owner, not you. That revenue credit belongs to the buyer.
Example: Your school collects tuition from 90 enrolled families averaging $1,200/month each. Total monthly tuition: $108,000. If closing happens on the 15th, roughly $54,000 in tuition has been collected but not yet “earned.” At closing, the buyer receives approximately $54,000 as a working capital credit — which either reduces their cash requirement or adjusts the seller’s net proceeds.
This is not a penalty for the seller. It’s an equitable adjustment reflecting who delivered which services. But sellers who haven’t anticipated this adjustment are sometimes surprised by how it affects their net proceeds at closing.
Accounts Receivable and Accounts Payable
In most childcare transactions: accounts receivable (tuition owed but not yet collected) stay with the seller — you collect it after closing. Accounts payable (bills accrued before closing) are generally the seller’s responsibility. But what about tuition more than 30 days past due? What about families who haven’t paid their security deposit? These nuances need to be explicitly addressed in the APA — not left to assumption.
How to Handle Working Capital Cleanly
- Know exactly what security deposits you’re holding. Prepare a list of outstanding family deposits 30 days before closing.
- Understand your tuition billing cycle. Know when tuition is collected and when it’s “earned” so you can calculate the pre-paid adjustment accurately.
- Get your accounts payable current. Pay outstanding vendor bills before closing — arriving at closing with a clean payables ledger reduces disputes.
- Work with your agent and attorney to address working capital explicitly in the APA, not as an afterthought during final walk-throughs.
What This Means for You
Working capital is not a reason to worry — it’s a reason to be organized and informed. The sellers who handle working capital smoothly are the ones who’ve thought about it in advance, not the ones who discover it as a surprise line item at the closing table. Know what you’re holding, prepare for the adjustments, and make sure everything is explicitly documented in your APA before you sign.
