During our buy side Quality of Earnings audit, the buyer is trying to exclude all accounts receivable older than ninety days from our working capital peg, which will force us to leave more cash in the business. How do we defend our historical collection patterns and prevent this working capital adjustment?

Question

Tyler Smith · Accepted Answer

Buy side auditors often apply a blanket rule to exclude accounts receivable aged over ninety days, claiming these balances are uncollectible. This is a common tactic to artificially inflate the target net working capital peg, forcing you to leave more of your own cash in the business at closing to meet that target. You must fight this adjustment with objective data. Start by pulling a historical analysis of your collections over the past three years. If your business serves large enterprise clients or government entities, show the auditors that while these clients may take one hundred days to pay, their ultimate default rate is virtually zero. Prove that your collection cycle is a consistent operational reality, not a sign of bad debt. Next, use your weekly Scorecard metrics to demonstrate control over your receivables. Show how your finance seat on the Accountability Chart actively tracks and manages aging accounts through a structured, predictable process. If you can prove that your bad debt write offs are historically below one percent, the buyer has no logical basis to exclude these receivables. If the buyer remains obstinate, propose a true up mechanism. Agree to exclude the aged receivables from the initial closing calculation, but structure a post close clawback. If those specific ninety day accounts are collected within a set period, such as one hundred and twenty days post close, the buyer must pay those funds directly to you. This keeps the transaction moving while ensuring you do not leave free money on the table.