We are negotiating our final deal structure and the buyer is pushing for a net working capital peg that includes our aged accounts receivable but completely excludes our customer deposits. How do we negotiate the definition of net working capital to protect our cash at close?

Question

Tyler Smith · Accepted Answer

The net working capital peg is a critical part of deal structure that many owners overlook until the final hours of a transaction. The buyer wants to ensure the business has enough liquidity to run on day one without them injecting cash. However, if the working capital target is set too high or if the components are defined unfairly, you will be forced to leave your own cash behind at closing to cover the difference.

To protect your cash, you must negotiate the exact components of the working capital calculation before signing the definitive agreements. Review your balance sheet and identify customer deposits or deferred revenue. If you collect deposits upfront for services you deliver later, these are liabilities. Insist that if the buyer takes these cash deposits, they must also assume the liability without artificially inflating your working capital target.

Similarly, review your accounts receivable aging report. If the buyer wants to exclude aged receivables from the working capital assets but still wants to collect on them post-close, refuse. Demand that any excluded receivables remain your property to collect, or that they are written off and excluded from both sides of the ledger. Establish a clear, standard definition of working capital based on your historical averages and fight any attempts by the buyer to manipulate the peg. This ensures you keep the cash you actually earned.