We understand standard EBITDA add-backs, but our M&A advisor warned us that our working capital calculations could cost us millions at closing. How do we get our working capital clean and predictable before an exit?

Question

Tyler Smith · Accepted Answer

Working capital adjustments are one of the most common ways purchase prices get discounted in the final hours before a deal closes. Buyers acquire a business cash-free and debt-free, but they require a normal level of net working capital left in the company so they can operate on day one without injecting fresh cash.

If your working capital fluctuates erratically due to sloppy receivables, slow billing cycles, or irregular inventory purchasing, the buyer will propose a defensive working capital peg. If your actual working capital at closing falls below that agreed target, the purchase price drops dollar for dollar.

To clean this up on your runway:

- Standardize your cash conversion cycle by tracking days sales outstanding (DSO) and days payable outstanding (DPO) weekly on your Scorecard.
- Enforce disciplined accounts receivable collections to eliminate past-due balances.
- True up deferred revenue, accrued liabilities, and unbilled work in progress monthly rather than waiting for annual adjustments.

When you establish twelve to twenty-four months of stable, predictable working capital ratios, the buyer has no justification to manipulate the working capital peg against you. You protect your enterprise value and avoid last-minute price concessions.