Our business operates with a highly efficient cash conversion cycle, but the buyer's Quality of Earnings provider is insisting on a trailing twelve month average Net Working Capital peg that includes a period of high Days Sales Outstanding before we automated our collection processes. How do we negotiate a normalized peg that reflects our current, more efficient operational cash cycle?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common places where sellers lose money at the closing table. A buyer's Quality of Earnings provider will often try to set a high peg based on historical averages, forcing you to leave excessive cash or receivables in the business.

If you have recently streamlined your cash conversion cycle, a trailing twelve month average is unfair. You must negotiate a normalized peg that reflects your current operational efficiency.

To defend your position, present your operational data showing your improved Days Sales Outstanding.

Prove that your new automated collections and tighter billing cadences are a permanent operational improvement, not a temporary blip.

We use the weekly scorecard metrics from our Level 10 Meetings to show the steady, permanent improvement in our collection cycles.

By proving that your working capital needs have structurally decreased, you can negotiate a lower peg. This allows you to extract the excess cash at closing rather than leaving your hard earned working capital behind for the buyer's benefit.