We know the buyer will set a Net Working Capital peg during due diligence. How do we manage our cash and inventory during our runway to prevent the buyer from using this peg to claw back money at closing?

Question

Tyler Smith · Accepted Answer

The Net Working Capital peg is a frequent source of post-transaction disputes, often resulting in a painful, unexpected price reduction for the seller. Buyers look at your historical working capital to establish a normal level of accounts receivable, accounts payable, and inventory required to run the business. If you artificially pump up your cash by delaying payments or neglecting inventory right before close, the buyer will adjust the purchase price to compensate.

To avoid paying this dumb tax, you must use your exit runway to establish a clean, predictable working capital cycle. Set aside dedicated Thinking Time to analyze your cash conversion cycle. Ask yourself: How might we optimize our inventory levels and collections process so that our baseline working capital is as low and efficient as possible before we sign the letter of intent?

By systematically reducing your average days sales outstanding and tightening inventory management, you lower the baseline peg that the buyer will establish. This frees up cash that you can safely distribute to yourself before the transaction closes. Use your weekly Level 10 Meeting to keep your leadership team focused on working capital metrics on your weekly Scorecard.

If you wait until you are in due diligence to address this, you will have no leverage. A savvy buyer will identify any recent anomalies in your accounts and use them to argue for a higher working capital peg, effectively leaving your money on the table. Start cleaning up your balance sheet habits at least eighteen months before you launch the sale process.