During the letter of intent negotiations, the buyer is proposing a net working capital peg based on our peak seasonal accounts receivable. How do we defend our cash position and establish a fair working capital target that does not leave our cash trapped in the business?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common areas where buyers try to quietly chip away at your purchase price. If the peg is set too high, you will be forced to leave extra cash in the business at close to cover the deficit, effectively reducing your net proceeds.

To defend your position, you must establish a normalized net working capital target based on a rolling twelve-month average, rather than a single seasonal peak. This smooths out any seasonal fluctuations in your accounts receivable and accounts payable. Use your EOS® Scorecard historical cash flow metrics to prove the natural cycles of your cash conversion.

Show the buyer that your collection processes are highly systemized and predictable. If your team consistently meets its collection targets through standard operating procedures, your working capital requirements are naturally optimized. Present this data clearly to show that a peak-month peg is an unrealistic representation of your true operating needs. Your recommendation is to insist on a twelve-month average peg and clearly define what constitutes cash and cash equivalents to prevent the buyer from locking up your excess operating cash at the closing table.