We understand buyers look at EBITDA, but we are confused about how Net Working Capital adjustments affect our final walk-away cash. How do we manage our accounts receivable and inventory on our exit runway so we do not get hit with a massive working capital peg adjustment at closing?

Question

Tyler Smith · Accepted Answer

Many owners are shocked to discover at closing that their final payout is hundreds of thousands of dollars lower than the agreed upon purchase price due to a Net Working Capital adjustment. Buyers expect to acquire a business with enough gas in the tank to run on day one. This means you must leave a normal level of working capital in the business, which is defined as current assets minus current liabilities.

During due diligence, the buyer will calculate a working capital peg, which is the historical average of your working capital over the last twelve months. If your working capital at closing is below this peg, the purchase price is adjusted downward, dollar for dollar.

To protect your cash, you must manage your working capital diligently throughout your exit runway. Do not let your accounts receivable blow out. Tighten your collections and ensure your customers are paying on time, as buyers will exclude receivables older than ninety days from the working capital calculation.

Similarly, optimize your inventory levels. Obsolete or slow moving inventory will be discounted or excluded by the buyer, leaving you to cover the gap. Keep your cash conversion cycle tight and consistent. By maintaining a clean, predictable working capital profile during your runway, you prevent surprise adjustments at the closing table and protect your hard earned equity.