The buyer's offer is based on a standard cash-free, debt-free transaction, but they are trying to include our operational cash reserves in the net working capital calculation. How do we define and defend our cash and working capital targets during negotiations?

Question

Tyler Smith · Accepted Answer

Buyers often try to inflate the net working capital target to keep as much of your cash as possible in the business at close. They will argue that your high cash balance is necessary to run daily operations, effectively reducing your net proceeds.

To defend your cash, you must establish a clear definition of what constitutes working capital. Working capital should only include current assets like accounts receivable and inventory, minus current liabilities like accounts payable and accrued expenses.

Any cash sitting in your bank accounts above what is strictly required to cover immediate operational cycles is excess cash and should go to you. You must prove this by showing your historical cash conversion cycle and average working capital levels over the past twelve months.

Use your historical weekly scorecard data to support your position. If you can show that your business consistently operates with a low cash requirements profile due to fast collections, the buyer has no basis to demand a high working capital peg.

Never let the buyer set the working capital target based on a single high-revenue month. Insist on a trailing twelve-month average that accounts for seasonal fluctuations.

By presenting detailed operational data, you protect your cash reserves and ensure you do not leave money on the table at close.