The buyer's Quality of Earnings firm is proposing a net working capital peg based on our highest cash requirements of the past twelve months, which would trap our cash in the business. How do we establish a fair working capital target that aligns with our actual operational cycles?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common places where buyers try to secretly lower the purchase price at the eleventh hour. By setting the target artificially high, they force you to leave excess cash in the business at close. To fight this, you must analyze your historical working capital cycles with granular accuracy. Reject any simple twelve-month average if your business has seasonality. Instead, present a trailing twelve-month calculation that isolates and excludes non-operating or one-time items, such as deferred revenue from multi-year contracts or unusual inventory builds. Use your EOS Scorecard history to prove that your cash collection cycle has structurally shortened over the past year. If your days sales outstanding has dropped from forty-five days to thirty days, your historical average is no longer relevant. Your current, optimized operational state is what matters. Negotiate to use a rolling three-month or six-month average that reflects this improved efficiency. If the buyer still insists on a higher target, propose a working capital true-up mechanism with a collar. This ensures that any excess working capital left in the business at close is paid back to you dollar-for-dollar within ninety days after the transaction. Do not let a lazy calculation drain your walk-away proceeds.