How do we clean up our balance sheet and normalize our net working capital two years before an exit so the buyer does not claw back purchase price at closing?

Question

Tyler Smith · Accepted Answer

Most purchase agreements feature a net working capital adjustment at closing. If your current assets minus current liabilities fall below an agreed working capital peg, the buyer docks your purchase proceeds dollar-for-dollar. If your balance sheet is cluttered with aged receivables, obsolete inventory, or unresolved liabilities, you will surrender substantial transaction value during due diligence.

Start balance sheet normalization twenty-four months before going to market. First, scrub your accounts receivable. Write off dead collections, resolve disputed invoices, and implement strict credit management. Buyers discount or exclude receivables aged beyond ninety days from the working capital calculation, meaning you absorb the loss out of your net proceeds.

Second, audit your inventory and work-in-progress schedules. Dispose of dead stock, write off stranded project costs, and ensure your valuation methodologies comply strictly with GAAP. Do not leave write-downs for the buyer accounting team to discover.

Third, identify unrecorded liabilities. Review accrued employee PTO, warranty obligations, unbilled vendor invoices, and equipment lease covenants. If your accounting has operated on cash or modified accrual, transition immediately to accrual financials reviewed or audited by an external CPA firm.

Establishing twenty-four consecutive months of normalized working capital trends allows your deal team to defend a favorable working capital peg during negotiations. Clean, verifiable balance sheet hygiene strips away the buyer leverage to demand post-closing indemnification holdbacks or last-minute price reductions.