Our buyer is insisting on calculating our Net Working Capital peg using cash-basis accounting because that is how we historically managed our books, but this ignores our significant unpaid invoices. How do we use the IVS 105 Market Approach to argue for an accrual-based working capital calculation that does not leave our cash trapped?

Question

Tyler Smith · Accepted Answer

Allowing a buyer to set your Net Working Capital peg on a cash basis when you have significant outstanding receivables is a quick way to leave millions of dollars on the table at close. You must force the buyer to transition the working capital calculation to GAAP accrual standards, and the IVS 105 Market Approach is your tool to do it.

The Market Approach requires that valuation metrics reflect typical transactions in the active market for similar businesses. In the private equity and mid-market M&A world, transactions are almost exclusively structured on an accrual basis.

Argue that using cash-basis accounting to set the peg is a deviation from standard market practice that artificially distorts the true operational cash conversion cycle of the business. Present a detailed historical reconstruction of your working capital over the last twelve months, converted to accrual-based accounting.

Show the buyer that your accounts receivable and accounts payable are highly predictable and that your actual working capital needs are stable when properly matched under accrual rules. This adjustment proves that your cash-basis books were simply a tax management strategy, not a reflection of operational reality. By aligning your deal terms with the objective market standards outlined in IVS 105, you protect your cash at close and prevent the buyer from using accounting technicalities to discount your proceeds.