The buyer wants to use a standard twelve-month rolling average to calculate our Net Working Capital target at close, but our rapid growth over the last two quarters means our current operational cash requirements are much higher than they were a year ago. If we use this backward-looking average, we will be forced to leave too much of our own cash in the business. How do we negotiate a more equitable Net Working Capital peg?

Question

Tyler Smith · Accepted Answer

Using a standard twelve-month rolling average for Net Working Capital during a period of rapid growth is a classic trap that can cost you millions at the closing table. The buyer is attempting to lock in a target that reflects a smaller version of your company, forcing you to fund their post-close operations with your pre-close cash. You must object to this methodology immediately and present a data-backed alternative.

Start by using your quarterly V/TO® projections and recent Level 10 Meeting™ scorecards to build a detailed, forward-looking cash flow model. Show the buyer how your working capital requirements have scaled directly with your recent revenue growth.
- First, propose using a shorter, more relevant look-back period, such as a three-month or six-month rolling average, to establish the target. This ensures the peg reflects the actual current scale of the business.
- Second, present your accounts receivable and accounts payable aging reports to prove that your cash conversion cycle is highly efficient and predictable.
- Third, argue for a seasonal adjustment or a working capital corridor. A corridor allows the final working capital figure to fluctuate within a reasonable range without triggering a dollar-for-dollar purchase price adjustment.

By presenting a tight, real-time analysis of your operational cash needs, you demonstrate to the buyer that you understand the mechanics of your cash flow. Frame the negotiation around operational necessity. If they want a business that continues to grow at this trajectory post-close, they must allow you to establish a working capital peg that supports that growth without penalizing your exit proceeds.