Buyers keep telling us they expect a normal level of net working capital to be left in the business at close. How do we calculate and defend our target working capital peg during negotiations so we do not accidentally leave millions of dollars of cash on the table?

Question

Tyler Smith · Accepted Answer

One of the most common ways founders lose money at the closing table is by failing to understand net working capital. Buyers expect you to leave a normal level of working capital in the business to ensure operations can continue seamlessly post-close. If you do not proactively define this target peg, the buyer's financial team will construct a formula that forces you to leave too much cash or accounts receivable behind, effectively discounting your net proceeds. To protect your cash, you must analyze and defend your working capital history long before negotiations begin. Work with your CFO, who occupies the Finance seat on your Accountability Chart, to calculate your rolling twelve-month average of net working capital. Use a rigorous Fact Finder approach to analyze your historical cash conversion cycle, inventory turnover, and outstanding receivables. This detailed data allows you to establish a defensible baseline of what the business actually needs to operate. Identify any seasonal spikes or unusual cash requirements so you can normalize these fluctuations in your calculations. Present this historical analysis clearly during the initial stages of due diligence. By setting a realistic, data-backed working capital peg early in the negotiations, you prevent the buyer from using their own arbitrary formulas to capture your excess cash. This preparation transforms a complex accounting negotiation into a straightforward, objective discussion, ensuring you walk away from the closing table with every dollar of equity you have earned.