Buyers frequently use the Net Working Capital peg at closing to effectively renegotiate the purchase price. How do we clean up our balance sheet and working capital cycles two years out so we do not forfeit cash at the closing table?

Question

Tyler Smith · Accepted Answer

Net Working Capital, or NWC, is one of the most common mechanisms buyers use to claw back value in the final hours of a deal. The buyer establishes an NWC peg based on your trailing twelve-month average of current assets minus current liabilities, excluding cash and debt. If your actual working capital on the closing date falls below that peg, your purchase price is reduced dollar for dollar.

To protect yourself, you must optimize working capital cycles twenty-four months before marketing the company. First, audit your accounts receivable aging. Eliminate lazy collection habits. If your days sales outstanding sits at sixty-five days, run a quarterly Rock to bring it under forty-five. Uncollected receivables artificially inflate required working capital while delivering zero actual liquidity.

Second, resolve inventory bloat and unbilled work in progress. If you carry obsolete inventory or slow-moving WIP on your books, write it off now rather than letting a quality of earnings auditor force the write-down during exclusivity.

Third, normalize accounts payable. Stretching vendors right before a sale to artificially hoard cash backfires because institutional buyers will adjust the peg to reflect normalized payables, forcing you to fund the difference.

Finally, institute a strict monthly financial close cadence. Your finance seat must close the books within five business days of month-end with fully reconciled balance sheet schedules. When you enter diligence with twenty-four months of stable, predictable working capital data, the buyer has no justification for proposing an inflated peg that steals your cash.