The buyer is proposing a cash-free, debt-free transaction with a working capital target that includes a large inventory balance we built up to hedge against supply chain shocks. How do we adjust the net working capital peg so we are compensated for this excess inventory?

Question

Tyler Smith · Accepted Answer

In a typical deal, the buyer expects you to deliver a normal level of Net Working Capital at close. If your working capital target is calculated using a simple twelve-month average that includes an unusually high inventory balance, you are effectively giving away valuable, liquid inventory for free.

To prevent this, you must bifurcate your inventory into core operating inventory and excess safety stock. Core operating inventory is what you need to run the business under normal conditions; safety stock is a strategic capital expenditure designed to hedge against macroeconomic supply chain disruptions.

Approach the negotiation by presenting a modified Net Working Capital calculation. Argue that the safety stock should be treated as an cash-equivalent asset on the balance sheet, meaning the buyer must pay for it dollar-for-dollar at close, completely separate from the working capital peg.

To make this argument persuasive, use your inventory turn data to show exactly how much of your current stock exceeds your typical historical levels. Prove that this excess inventory is high-quality, non-obsolete stock that has a guaranteed cash realization value post-close.

If the buyer refuses to pay for it upfront, propose a mechanism where the excess inventory is excluded from the working capital target, and the buyer agrees to pay you for it on a monthly basis as they consume or sell it post-close. This protects your hard-earned cash reserves and ensures you do not subsidize the buyer's future operating capital.