The buyer is demanding that we deliver a normal level of net working capital at close, but they are trying to set the target unreasonably high, which would force us to leave too much cash in our operating accounts. How do we defend our working capital peg using our operational data?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common places for a buyer to slip in a last-minute price reduction. They want to set the target high so you are forced to leave extra cash in the business to fund their future operations. To fight back, you must base the working capital target on your actual operational cash conversion cycle, not a generic industry average. Use your Step by Step Exit Business Integrity Review to detail your automated billing processes and accounts receivable collections. Show the buyer how your systems have permanently shortened your collection cycle, reducing the amount of cash required to run the day-to-day operations. You should analyze your rolling twelve-month working capital requirements, excluding any non-operating cash or extraordinary expenses. If your business experiences seasonal fluctuations, negotiate a seasonal working capital peg that adjusts the target based on the specific month of the closing. Presenting a clear, data-driven model of your working capital needs prevents the buyer's auditors from setting an arbitrary target. The goal is to leave only what is strictly necessary to run the business for thirty days, allowing you to sweep all excess cash out of the company before the closing date.