We have heard horror stories about buyers using net working capital peg calculations during due diligence to claw back millions of dollars from the final purchase price. How do we manage our working capital on our exit runway to establish a clean, defensible peg that protects our cash at close?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common battlegrounds in a business transaction. Buyers will analyze your trailing twelve months of working capital to establish a baseline or peg. If your working capital is artificially high at close, the buyer will demand a price reduction or expect you to leave a significant amount of cash in the business. To protect your proceeds, you must actively manage your working capital on your exit runway. Start by tracking your accounts receivable days outstanding and your inventory turnover ratios on your weekly EOS® Scorecard. You must establish a consistent, predictable rhythm of collections and inventory management at least eighteen to twenty-four months before you go to market. This prevents sudden spikes or dips that a buyer can exploit during negotiations. Ensure your finance seat on the Accountability Chart is fully responsible for optimizing cash flow and maintaining clean, auditable balance sheets. During your quarterly planning sessions, use the IDS™ process to resolve any recurring bottlenecks in your billing or supply chain operations. By presenting a clean, consistent, and optimized historical working capital trend, you take away the buyer's ability to argue for a higher peg, ensuring you keep more of your hard-earned cash when the deal closes.