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 will 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.

If you accept a peg based on historical averages, you will be forced to leave extra cash in the business at closing to meet that artificially high target. To prevent this, you must present a data-driven argument that proves your new, leaner working capital level is sustainable.

First, 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.

Second, propose 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 This ensures the peg reflects your current operational reality rather than outdated inefficiencies.

Use your weekly scorecard metrics 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, they will have little ground to stand on when demanding a historical average.