The buyer is pushing for a net working capital peg based on a straight twelve-month historical average, but our recent operational improvements have permanently reduced our inventory needs. How do we negotiate an adjusted peg to avoid leaving cash on the table?

Question

Tyler Smith · Accepted Answer

A straight twelve-month average for your net working capital peg penalizes you for becoming more efficient. If your leadership team set Rocks to optimize inventory levels or shorten your days sales outstanding, your current cash requirement is significantly lower than it was a year ago.

To defend your cash, you must refuse the standard historical average and propose an adjusted peg.

- Calculate a weighted average of the last three to six months to reflect your new, highly efficient operational baseline.

- Argue under IVS 105 that your current working capital efficiency is a permanent value driver that should not be diluted by legacy inefficiencies.

- Present the buyer with clear data from your weekly Level 10 Meetings showing the permanent reduction in inventory cycles and cash conversion times.

If the buyer refuses to adjust the peg, demand a dollar-for-dollar increase in the purchase price for the excess cash left in the business at close. Do not allow the buyer to use historical averages to capture the cash benefits of your operational improvements.