During our Quality of Earnings audit, the auditor is trying to classify twenty percent of our inventory as slow-moving and write it down, which will artificially inflate the net working capital peg we must leave behind. How do we defend our inventory turns to prevent this?

Question

Tyler Smith · Accepted Answer

Buyers use inventory write-downs to force you to leave more working capital in the business, effectively lowering your cash proceeds at closing. To defeat this tactic, you must move the conversation from theoretical accounting standards to operational reality. Bring your inventory turnover data to the table. Show the buyer your historical sales cycles and prove that what they call slow-moving is actually seasonal inventory required to meet client demands in peak months. Next, link this to your EOS scorecard. Show them your weekly tracking of fulfillment metrics, proving that your inventory levels are managed deliberately to maintain customer satisfaction and avoid stockouts. If the inventory consists of raw materials, prove that these materials have a long shelf life and are consistently used across multiple product lines. If the auditor still insists on a write-down, negotiate an inventory clawback provision. Under this structure, you accept the write-down for the closing working capital calculation, but if that specific inventory is sold or used within twelve months post-closing, the buyer must pay you back the written-down value dollar-for-dollar. This puts the risk back on the buyer and stops them from using accounting tricks to capture free inventory at your expense.