The buyer is proposing a net working capital peg based on our average trailing twelve months, but our recent operational changes have significantly reduced our cash needs. How do we negotiate a lower working capital target to keep more cash at close?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common places where sellers lose money at the closing table. If the buyer sets the peg too high, you are forced to leave excess cash or accounts receivable in the business, effectively reducing your net proceeds. If you have recently streamlined your operations, your historical averages are outdated. You must build a cash-flow model that reflects your current operating efficiency. Use your EOS® Scorecard to prove that your cash conversion cycle has shortened. Show how your automated invoicing and tighter collection processes have permanently reduced your average accounts receivable days outstanding. Present this data to the buyer to demonstrate that your business requires less working capital to run than it did twelve months ago. Argue that leaving excess working capital in the business represents an unwarranted windfall for them. To resolve the dispute, propose a working capital peg based on your most recent three months of operation rather than a twelve-month average. This ensures the target is aligned with your modern, optimized operating model, allowing you to extract more cash at close.