The buyer wants to use a simple twelve-month trailing average to set our net working capital target, but our business grew forty percent last year. How do we negotiate a working capital peg based on our forward-looking run-rate?

Question

Tyler Smith · Accepted Answer

Using a trailing twelve-month average to set the net working capital target is standard practice, but it is highly punitive for high-growth businesses. If your revenue has grown forty percent over the past year, your historical average working capital will be artificially low compared to what the business actually needs to run at its current scale. Agreeing to a trailing average means you will have to leave too much cash in the business at closing to fund the difference.

To negotiate a fair working capital target, you must base the calculation on your forward-looking run-rate and your current cash conversion cycle. Use your EOS V/TO and financial models to present a clear picture of your projected revenue and expenses. Prove that your working capital requirements are tied to current run-rate operations, not the smaller business you operated twelve months ago.

Calculate your actual net working capital as a percentage of revenue for the last three months, rather than the last twelve. Argue that this shorter, recent window represents the true operational reality of your scaled business.

If the buyer remains stubborn, suggest a working capital peg that adjusts post-closing based on actual performance during the transition period. This ensures that you are only delivering the amount of working capital necessary to support the revenue that the buyer actually receives, preventing them from taking an unfair cash windfall at your expense.