Our revenue grew thirty percent over the last twelve months, and the buyer wants to set our target working capital peg using a simple trailing twelve-month average. How do we push back against this method so we do not leave excess cash behind at closing?

Question

Tyler Smith · Accepted Answer

A trailing twelve-month average working capital calculation is inherently biased against a high-growth company. In a business expanding at thirty percent annually, working capital levels from ten or twelve months ago reflect a substantially smaller enterprise. Averaging those smaller months artificially deflates the target peg, creating an unrealistic baseline. If the peg is set incorrectly, the normal operating cash and receivables generated by your recent growth will be classified as a shortfall or surrendered to the buyer at closing without compensation.

To defend your cash, propose a peg based on working capital as a percentage of recent revenue or a trailing three-month annualized average. Show the mathematical correlation between your recent monthly run-rate and the current operating liquidity required to support that revenue.

Utilize your weekly Scorecard metrics to demonstrate working capital velocity. Present Days Sales Outstanding, inventory turnover, and Days Payable Outstanding across the last four quarters. Prove that your working capital ratio has remained efficient and that the dollar expansion in current assets is strictly a function of top-line scaling, not operational bloat.

Furthermore, eliminate non-operating or abnormal balances from the peg calculation. Ensure prepaid expenses, customer deposits, and accrued bonuses are normalized consistently in both the historical periods and the closing balance sheet. By anchoring the working capital discussion to percentage of forward revenue rather than an outdated historical dollar average, you preserve your closing proceeds and prevent the buyer from acquiring your growth capital for free.