We are entering our final twelve-month exit runway and need to optimize our working capital. How do we adjust our accounts receivable and inventory management processes to ensure our working capital peg is favorable at the closing table?

Question

Tyler Smith · Accepted Answer

Working capital is one of the most heavily negotiated aspects of a business sale, and failing to manage it properly on your exit runway can cost you hundreds of thousands of dollars at the closing table. Buyers will establish a working capital peg based on your historical averages, and any shortfall at closing will be deducted directly from your purchase price.

To protect your payout, you must optimize your working capital cycle during the final twelve to twenty-four months of your exit runway. Focus on shortening your cash conversion cycle by tightening your accounts receivable collections and extending your accounts payable terms where appropriate. Clean up old, uncollectible receivables and write down obsolete inventory so your balance sheet reflects current operational realities.

Review your inventory management processes to ensure you are running lean without disrupting your delivery capabilities. If your working capital fluctuates wildly due to seasonal trends, document these cycles clearly so your M&A advisor can negotiate a fair working capital peg that accounts for these fluctuations. By managing your cash, receivables, and inventory with disciplined, consistent processes, you demonstrate operational control and protect your hard-earned equity when it is time to close the deal.