The buyer is proposing a net working capital peg based on a simple twelve-month historical average, but our cash requirements fluctuate wildly due to seasonal software licensing renewals. How do we negotiate a fairer working capital target that does not leave our cash trapped in the business at close?

Question

Tyler Smith · Accepted Answer

Buyers often use a simple twelve-month average for the net working capital target because it is easy and favors them if you are growing or have highly seasonal expenses. If you accept a target that does not account for your seasonal software renewals or cash collection cycles, you risk leaving a significant amount of your own cash in the business for the buyer's benefit.

You must build a detailed, cash-flow model that maps your daily and monthly working capital requirements over the last twenty-four months. Highlight your high-cash and low-cash cycles, specifically focusing on when pre-paid software subscriptions or annual client renewals occur. This allows you to argue for a seasonal peg or a rolling average that aligns with your operational reality.

Bring this issue to your leadership team during your weekly Level 10 Meeting™ and assign your finance lead the task of pulling exact historical accounts receivable and accounts payable aging reports. Use this data to negotiate a target that reflects a true operating working capital baseline. Do not allow the buyer to double-dip by excluding deferred revenue while keeping the cash associated with it. A well-argued, data-driven working capital model protects your proceeds and ensures you walk away with the cash you actually earned.