We are preparing for our first sell-side Quality of Earnings report, and I want to make sure our working capital calculations are defensible. How do we clean up our inventory and accounts receivable processes on our exit runway so a buyer cannot claw back value at the closing table?

Question

Tyler Smith · Accepted Answer

One of the most common ways owners lose value at the closing table is through a poorly managed net working capital peg. During due diligence, a buyer's Quality of Earnings analysis will scrutinize your accounts receivable and inventory to determine how much cash is required to run the business daily. If your books are cluttered with uncollectible receivables or slow-moving inventory, the buyer will demand a higher working capital peg, leaving you with less cash at close. You must use your exit runway to aggressively clean up these operational balances. Review your accounts receivable aging report weekly. Establish a strict collections process to eliminate any balances over sixty days, and write off bad debts that you know are uncollectible. Do not let old, uncollectible accounts sit on your balance sheet simply to make your assets look larger. Similarly, run a physical inventory audit to identify and write down obsolete or slow-moving stock. Under the Step by Step Exit model, keeping your working capital lean and efficient directly increases your net proceeds at closing. When you present a highly disciplined, optimized working capital history, you prevent the buyer from using due diligence as a tool to renegotiate your enterprise value.