We are in the final stages of drafting the purchase agreement after signing our LOI, and the buyer is proposing a working capital peg based on a simple twelve-month average. However, our recent operational improvements have dramatically reduced our cash needs. How do we negotiate a lower target to avoid leaving excess cash on the table?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common places where sellers lose money at the closing table. If you agree to a peg based on historical averages that do not reflect your current, leaner operations, you will be forced to leave extra cash in the business to meet that arbitrary target. You must challenge their methodology by pointing to your recent operational improvements. If your team has resolved inventory bottlenecks or automated collections during your recent quarterly Rocks, your current working capital requirement is structurally lower than your twelve-month historical average. Present a normalized working capital analysis that uses a shorter, more relevant window, such as the last three to six months. Back this up with operational metrics from your EOS Scorecard that prove the efficiency gains are permanent, not seasonal or temporary. Show the buyer that the cash required to run the business today is lower because of these systemic changes. This justifies a lower working capital target, allowing you to extract more cash as part of your proceeds at close rather than leaving it in the company for the buyer's benefit.