Our new AI-driven billing system has permanently lowered our days sales outstanding and normalized our cash cycle, but the buyer wants to use a trailing twelve-month average for the net working capital peg. How do we negotiate a seasonal or adjusted peg that reflects our new, highly efficient operational baseline?

Question

Tyler Smith · Accepted Answer

A trailing twelve-month average for your net working capital peg is a standard formula, but it will penalize you if you have recently optimized your operations. By implementing an AI-driven billing system, you have accelerated collections and permanently reduced your accounts receivable. If you accept a peg based on your older, slower collection cycles, you will be forced to leave excess cash in the business at close to meet that artificially high target.

To defend your cash, you must present a normalized net working capital analysis that isolates the post-implementation period. Show the buyer the direct correlation between your AI system launch and the permanent drop in your days sales outstanding. Use your weekly Scorecard metrics to prove that this lower working capital level is your new, sustainable operational baseline.

Under the IVS 105 framework, argue that using historical averages that include pre-automation months violates the principle of representing current economic reality. Propose a working capital peg based on a trailing three-month average instead of a twelve-month average.

If the buyer resists, propose a two-way working capital adjustment mechanism that reflects this new efficiency. If you deliver working capital at close that exceeds the target, you get a dollar-for-dollar upward adjustment to the purchase price. This ensures you pocket the cash flow savings your automation created.