The buyer is insisting on a standard cash-free, debt-free deal, but they are trying to set the net working capital peg using a twelve-month average that includes a period before we fully automated our operations. How do we negotiate a more accurate working capital target?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free transaction, the net working capital peg is one of the most common places where owners get quietly robbed. If your operational efficiency has skyrocketed over the last few months due to automation and better processes, a traditional twelve-month average is outdated. It will force you to leave too much cash in the business at closing.

You must demand a shorter look-back period, such as the last three or six months, to set the working capital baseline. Back up this demand with your weekly scorecard data. Show the buyer that your cash conversion cycle has permanently compressed. Your accounts receivable are collected faster and your inventory or resource allocation is more precise. Since your modern operating model requires less capital to run, the working capital target must be adjusted downward. This allows you to extract more cash at the closing table rather than leaving it trapped in the company. Present this as a structural operational improvement, not a temporary cash fluctuation.