The buyer is proposing a standard cash-free, debt-free deal but wants to set the Net Working Capital peg using an arbitrary trailing twelve-month average that ignores our recent operational efficiency gains. How do we negotiate a tighter working capital collar to prevent giving away our excess cash at close?

Question

Tyler Smith · Accepted Answer

Buyers often try to use the Net Working Capital target to claw back cash at closing by setting a target that is artificially high. If your business has recently implemented process improvements that have accelerated your cash collection cycle, a standard twelve-month historical average will penalize you. It forces you to leave too much cash in the business to fund a working capital peg that is no longer representative of your current operational efficiency. To fight this, you must present the buyer with your current operational data. Use your weekly Scorecard to show your true cash conversion cycle and how your accounts receivable and accounts payable processes have improved. Propose a shorter, more relevant look-back period, such as the last three or six months, to establish the target. Additionally, you should negotiate a working capital collar. This is a range around the target within which no purchase price adjustment is made. By establishing a reasonable collar based on your current operational velocity, you protect your proceeds from being chipped away by outdated historical averages. Do not let a generic accounting formula strip away the cash that your operational discipline has generated.