The buyer is insisting on a cash-free, debt-free deal structure but wants us to leave a massive net working capital target that includes our high-yield accounts receivable. How do we negotiate a working capital peg that does not force us to transfer our hard-earned cash collections to the buyer?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free transaction, the buyer expects the business to have enough working capital to run on day one. However, if your accounts receivable are highly liquid and collect quickly, a high working capital peg effectively forces you to gift your cash to the buyer. To prevent this, you must negotiate a customized net working capital peg that reflects your actual cash conversion cycle. Analyze your working capital requirements over the past twelve months on a rolling basis. If your automated billing and collections systems keep your Days Sales Outstanding exceptionally low, you have a highly efficient cash cycle that requires less working capital. Present this data to the buy-side Quality of Earnings team. Prove to them that because your operations require very little cash to run, the working capital peg should be set at a much lower level. If they still insist on a high peg, negotiate a true-up mechanism. This mechanism should specify that any accounts receivable collected within ninety days post-close that exceed the negotiated working capital target must be paid directly to you as additional purchase price. This protects your cash flow and ensures you are paid for the work you performed pre-close.