The buyer is pushing for a debt-free transaction but is demanding that we leave all outstanding accounts receivable in the business while requiring us to pay off all accounts payable at close. How do we negotiate the working capital peg to ensure we receive proper value for our uncollected receivables instead of handing over free cash flow to the buyer?

Question

Tyler Smith · Accepted Answer

In a standard cash-free, debt-free transaction, buyers negotiate a net working capital peg to ensure they receive a business with enough operating liquidity to run on day one. However, buyers often try to set this peg artificially high, forcing you to leave significant accounts receivable in the business without receiving credit for them.

To protect your cash proceeds, you must negotiate a working capital peg based on a trailing twelve-month average of your actual operational needs. Demand that your accounts receivable be valued based on their historical collectability rather than allowing the buyer to apply an arbitrary write-down.

To achieve this, use your weekly EOS® scorecard metrics to defend your working capital position:

- Present your historical average days sales outstanding to prove your collections process is tight and predictable.
- Show your low write-off history to demonstrate that your receivables are high-quality assets, not bad debt.
- Argue that since you paid the operational costs to generate these receivables, you should receive a dollar-for-dollar upward adjustment to the purchase price for any working capital delivered above the agreed peg.

This data-driven approach shifts the negotiation from subjective opinions to objective historical facts, preventing the buyer from trapping your cash in the business.