The buyer is insisting on a net working capital target that includes a large amount of slow-moving inventory we accumulated to prevent supply chain disruptions. How do we adjust the working capital definition to exclude this excess inventory so we do not end up giving it to the buyer for free?

Question

Tyler Smith · Accepted Answer

Net working capital targets are designed to ensure the business has enough liquidity to operate normally post-close. However, if you have accumulated strategic, slow-moving inventory, including it in the baseline target means you are essentially giving away valuable assets without compensation.

To protect your cash, you must argue that this excess inventory is a strategic safety stock, not normal operating inventory. Present your historical inventory turns and prove that your normal operations require a much lower baseline of working capital.

Propose a working capital definition in the purchase agreement that explicitly excludes any inventory aged over a certain number of days, or value it at scrap or cost and carve it out of the peg.

Use your operational data to defend this carve-out. Show how your weekly Scorecard tracks inventory levels and how your strategic decision to over-buy was a temporary measure to protect client delivery rather than a permanent operational requirement.

If the buyer still wants the excess inventory, negotiate a separate purchase price adjustment where they pay for the strategic stock dollar-for-dollar over and above the agreed-upon enterprise value. This ensures you are compensated for the cash you spent to secure those materials, keeping your net proceeds intact at closing.