The buyer is trying to set our Net Working Capital peg using a twelve-month average that includes a massive bubble of raw materials inventory we built up during pandemic supply shortages. How do we negotiate a seasonal or normalized peg that does not force us to leave millions in working capital behind?

Question

Tyler Smith · Accepted Answer

The Net Working Capital peg is one of the most common places where buyers try to claw back value late in a transaction. By insisting on a straight twelve-month average that includes an abnormal inventory bubble, they are forcing you to leave excess working capital in the business at close without compensation. You must push back with a normalized, data-driven analysis.

First, isolate the inventory anomaly. Calculate the historical baseline of your raw materials inventory before the supply chain crisis and show how it has normalized over the last three to six months. Under IVS 105, valuations must reflect typical, normalized operating conditions. Argue that using a trailing twelve-month average distortingly counts a temporary cash outflow as a permanent working capital requirement.

Second, propose a target peg based on your forward-looking run rate. Since your operations are now leaner, your actual working capital needs are much lower. Suggest a peg based on the most recent three-month average, which accurately reflects your current, stabilized inventory levels.

Third, use your EOS metrics to prove you have institutionalized this leaner inventory management. Share your inventory turn metrics from your weekly scorecard to prove that you are running a highly efficient, predictable supply chain that does not require excess cash buffers. By showing that your current working capital levels are structurally permanent, you can negotiate a lower peg and take your excess cash out of the business at close.