Our automated business model allows us to run on negative working capital because clients pay upfront, but the buyer is demanding a normalized net working capital peg that forces us to leave substantial cash in the business. How do we defend our negative working capital structure?

Question

Tyler Smith · Accepted Answer

If your automated business model allows you to collect cash from clients upfront, you naturally operate with negative net working capital. Buyers accustomed to traditional businesses will often try to apply a standard net working capital peg that forces you to leave a massive cash buffer in the business at close, which is essentially a hidden price cut.

To defend your negative working capital structure, you must show that your cash collections are highly automated and predictable. Use your EOS scoreboard data to demonstrate your cash-conversion cycle. Prove to the buyer that your receivables velocity is so high that you do not require a cash cushion to fund daily operations.

Explain that your deferred revenue liability is not a debt that requires cash settlement, but rather an obligation to perform services that are executed at very high margins. If you leave cash in the business to cover these liabilities, and the buyer also gets the future cash from new upfront sales, they are double-dipping.

Propose a negative working capital peg based on your actual historical average over the last twelve months. If your average net working capital is negative fifty thousand dollars, then the peg should be negative fifty thousand dollars. This ensures that you only leave the exact amount of working capital necessary to run the business, allowing you to sweep all excess cash at close.