We are negotiating the working capital peg with a buyer, and they are trying to set a target that seems artificially high, which would force us to leave too much cash in the business at close. How do we defend our position?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common battlegrounds in M&A transactions. Buyers want a high peg to ensure they do not have to inject cash into the business on day one, while you want a lower peg to maximize your cash proceeds at close. To defend your position, you must present a highly detailed, data driven analysis of your historical working capital cycles. Do not rely on simple averages that ignore seasonality or growth trends. Show how your cash to cash cycle operates over a twelve month period. Tie this directly to your operational metrics, such as inventory turns and accounts receivable days. If you have modernized your operations using automated workflows or tighter inventory management, prove that your actual cash needs have permanently decreased. This operational efficiency is part of what the buyer is purchasing, and they should not benefit from historical inefficiencies. Present your working capital requirements as a range rather than a single number, and show how your current operational rhythm supports this lower range. By grounding the negotiation in operational reality rather than arbitrary formulas, you protect your cash at close.