We keep hearing about the net working capital peg during deal negotiations and how it can strip cash from the owner at closing. How do we manage and optimize our working capital cycle on our exit runway so we do not leave millions of dollars on the table?

Question

Tyler Smith · Accepted Answer

Many owners are shocked to learn that selling their business does not mean they get to sweep all the cash out of the bank account at closing. Buyers expect the business to be delivered with a normal level of net working capital, which is defined as current assets minus current liabilities. This target level is known as the working capital peg. If your actual working capital at closing is below this peg, the buyer will reduce your purchase price dollar for dollar.

To protect your cash at close, you must manage your working capital cycle aggressively during your exit runway. Start by reviewing your accounts receivable and accounts payable. If you have slow paying customers, tighten your credit terms and accelerate collections. Simultaneously, optimize your inventory levels to ensure you are not carrying excess stock that ties up cash.

Your goal is to establish a lean, consistent working capital trend over the twelve to twenty-four months preceding a sale. If your business operates efficiently with a lower level of working capital, the historical peg negotiated during the transaction will be lower. This allows you to legally distribute more cash to yourself prior to closing. Work with your CFO and use your weekly Level 10 Meeting™ to track days sales outstanding and days inventory outstanding as critical metrics. Optimizing these numbers on your runway ensures you do not end up funding the buyer's post closing operations with your hard earned equity.