The buy-side accountants are proposing a net working capital target that includes our oldest, slow-paying accounts receivable, which we know they will write off post-close and then claw back from our escrow. How do we clean up our balance sheet during diligence to establish a fair working capital baseline?

Question

Tyler Smith · Accepted Answer

If you leave aged accounts receivable on your balance sheet during due diligence, the buyer will include them in your net working capital target. Post-close, the buyer's collections team will inevitably fail to collect these old debts, write them off, and then demand a dollar-for-dollar reduction in your purchase price via an escrow clawback.

To prevent this, you must clean up your balance sheet before you finalize the purchase agreement. Review your accounts receivable aging report. Write off any balances that are past ninety days and unlikely to be collected.

For slow-paying clients that are still viable, restructure their terms. You can use your weekly EOS® Scorecard to track collection efficiency and ensure your average days sales outstanding is as low as possible before close.

By proactively writing off or collecting aged accounts, you establish a clean, realistic net working capital peg. This prevents the buyer from inflating the target with uncollectible assets.

It also protects your escrow account. The buyer cannot claw back funds for uncollectible receivables if those receivables were never included in the deal structure in the first place. This keeps your transaction clean and ensures your post-close proceeds remain in your hands.