We are two years out from a sale and our M&A advisor mentioned the buyer will require a net working capital peg. How do we manage our inventory and accounts receivable on our runway so we do not get trapped in a working capital dispute at closing?

Question

Tyler Smith · Accepted Answer

Net working capital is one of the most common battlegrounds in a business sale. Buyers will establish a working capital peg based on your historical average. If your accounts receivable are bloated or your inventory is poorly managed when you close, you will be forced to leave extra cash in the business to meet that peg, effectively reducing your net proceeds.

You must start optimizing your working capital cycle two years before your exit. Review your accounts receivable processes. Tighten your credit terms, automate your collections, and systematically eliminate delinquent accounts.

Next, audit your inventory management. Liquidate slow-moving or obsolete stock. While this might write down some assets on your balance sheet, it cleans up your inventory turnover metrics and shows a highly efficient operation.

Use your weekly EOS Scorecard to track your days sales outstanding and inventory turn ratios. These metrics must be consistent and predictable.

When you present your financials to a buyer, a clean and predictable working capital cycle prevents them from setting an artificially high peg. It also proves that your cash flow is predictable and not artificially inflated by holding back payments to vendors. Managing this on your runway ensures you keep more cash in your pocket at closing.