The buyer is pushing a standard cash-free debt-free deal structure, but our operations require a significant cash cushion to fund upfront supplier deposits. How do we negotiate a customized net working capital target that does not strip our business of the liquidity needed to run post-close?

Question

Tyler Smith · Accepted Answer

In a cash free debt free transaction, the seller keeps the cash and pays off the debt, but must deliver the business with a normal level of net working capital. Buyers often try to inflate this target, which effectively forces you to leave extra cash in the business, lowering your net proceeds. If your business model requires upfront cash deposits for suppliers, a generic working capital formula will hurt you. To defend your position, you must present a detailed, twelve month rolling analysis of your working capital cycle. Show the buyer the exact timing difference between when you pay suppliers and when you collect from customers. Prove that your cash cushion is not excess profit, but an operational necessity to fund your Rocks and maintain inventory. Argue for a customized working capital peg that excludes these prepayments or compensates you dollar for dollar for cash left in the business to fund them. You can also structure the deal so that the buyer assumes these deposits as part of the operating assets, adjusting the purchase price upward to reflect the value you are leaving on the table. This keeps you from being penalized for your operational efficiency.