The buyer wants to structure the transaction as an asset sale to get a tax step-up, but they also want us to leave all of our accounts receivable in the business to meet a high working capital peg. How do we structure the purchase price adjustment to ensure we are compensated for this working capital?

Question

Tyler Smith · Accepted Answer

An asset sale allows the buyer to step up the tax basis of your assets, but it often leaves you with significant tax friction. When the buyer also insists that you leave your accounts receivable behind to meet an artificially high net working capital peg, they are essentially trying to fund a portion of the purchase price with your own cash.

To protect yourself, you must establish a clear definition of the net working capital peg during the letter of intent stage. Use your weekly Scorecard history to calculate a rolling twelve-month average of your working capital needs, rather than letting the buyer use a single, high-water mark from a peak month.

If the buyer insists on keeping the accounts receivable to ensure operational continuity, you must negotiate a dollar-for-dollar gross-up of the purchase price for any working capital left in the business that exceeds the historical average.

Alternatively, structure the deal so that the accounts receivable are excluded from the transaction entirely, allowing you to collect those funds post-close while the buyer uses a working capital line of credit to fund their operations.

By using your actual cash flow cycles to defend a lower working capital peg, you prevent the buyer from trapping your cash in the business and ensure you walk away with the full value of your hard-earned assets.