The buyer's proposed net working capital target uses a trailing twelve-month average that does not account for our recent shift to a leaner, automated billing cycle. How do we negotiate a working capital peg that reflects our improved cash conversion cycle instead of historical averages?

Question

Tyler Smith · Accepted Answer

A standard trailing twelve-month average for net working capital can unfairly penalize a business that has recently optimized its operations. If you have shortened your cash conversion cycle by automating your billing and collections, you are operating with less working capital today than you did a year ago.

Accepting a peg based on historical averages would force you to leave extra cash in the business at closing to meet an artificially high target. To avoid this, you must present a data-driven argument demonstrating that your new, leaner working capital level is sustainable.

Here's how to negotiate effectively:

• Analyze Recent Data: Run a regression-based analysis of your accounts receivable and accounts payable over the last three to six months. Show the buyer the direct correlation between your newly integrated software workflows and the permanent drop in days sales outstanding (DSO).
• Propose a Weighted Average: Suggest a modified working capital peg that weights the most recent three months more heavily than the earlier months of the year. This ensures the peg reflects your current operational reality rather than outdated inefficiencies.
• Leverage Scorecard Metrics: Use your weekly [scorecard metrics](/qa/how-to-review-scorecard-under-five-minutes) to demonstrate that this is not a temporary cash squeeze, but a structural improvement in your business model. When you show the buyer that your team consistently manages [working capital within a tight, predictable range](/qa/leading-vs-lagging-scorecard-metrics), they will have little ground to stand on when demanding a historical average. This data provides concrete evidence for a [strategic premium multiple](/qa/operational-playbooks-for-strategic-premium-multiples) and proves your business is turn-key.

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