The buyer wants to use a twelve-month rolling average for our accounts receivable aging peg, but our collections have dramatically improved over the last six months. How do we negotiate a working capital target that reflects our current, optimized cash cycle?

Question

Tyler Smith · Accepted Answer

Using a simple twelve-month average for your net working capital peg when your collections have recently improved is a classic buyer trap. It forces you to leave extra cash in the business at close to cover an artificially high working capital target, effectively handing your hard-earned cash over to the buyer for free. To fight this, you must base your target on your current operational reality, not your past inefficiencies. Present your monthly accounts receivable metrics from the last six months to show a clear, sustained trend of faster collections. Highlight the operational improvements, such as automated payment terms or tighter credit policies, that drove this change. Propose using a shorter, more relevant look-back period, such as a three-month rolling average, to establish the net working capital peg. This shorter window accurately reflects your current cash conversion cycle and prevents you from being penalized for old, slow collections. Use your weekly Scorecard metrics and cash flow forecasts to support your position. If you can prove that your optimized collections are systemic and sustainable, you can successfully negotiate a lower working capital target, keeping more cash in your pocket when the deal closes.