The buyer's draft letter of intent states the transaction will be cash-free and debt-free with a normal level of working capital left in the business. Our AI-driven collection workflows have cut our cash conversion cycle in half over the past year, meaning we run on very little cash. How do we define and negotiate the working capital peg so we do not leave our hard-earned cash in their hands at closing?

Question

Tyler Smith · Accepted Answer

In a typical transaction, the buyer expects a normal level of net working capital to be left in the business at close to ensure they can run operations on day one without immediate cash injections. If your business is highly efficient, a standard twelve-month rolling average calculation can force you to leave excess cash on the table. If you have implemented AI-automated collection processes or optimized your service delivery, your cash conversion cycle is likely much shorter than the industry average. This means your operational cash requirements are significantly lower. To protect your cash at close, you must negotiate a working capital peg based on your current, optimized run-rate rather than a historical twelve-month average. Present the buyer with precise cash flow data showing how your automated workflows have permanently reduced your accounts receivable days outstanding and inventory hold times. Argue that leaving historical levels of working capital in the business would represent an unjustified windfall for the buyer. By demonstrating that your lean operating model safely requires less cash to sustain growth, you can negotiate a lower working capital target and walk away with more cash in your pocket at closing.