The buyer is demanding we exclude our aged inventory from the net working capital calculation while forcing us to include all aged accounts payable. How do we structure a collar or a reciprocal aging rule to prevent a pre-close cash drain?

Question

Tyler Smith · Accepted Answer

Buyers will use the net working capital calculation to reduce the cash you receive at closing. By arbitrarily excluding your aged inventory while forcing you to include all outstanding liabilities, they are attempting to artificially inflate the working capital target, requiring you to leave more cash in the business.

To stop this, you must demand a reciprocal aging rule in the purchase agreement. Under this rule, if the buyer insists on excluding inventory that is older than ninety days, they must also exclude any accounts payable that are older than ninety days. This maintains a fair, balanced calculation of your actual operating liquidity.

Additionally, you should structure a net working capital collar. A collar defines an acceptable range of working capital, rather than a single fixed number. If the actual working capital at closing falls within this collar, no adjustment is made to the purchase price. This prevents minor fluctuations in your inventory or payables from triggering a post-close dispute.

Support your position by using your weekly scorecard data to show your historical inventory turns and cash conversion cycle. Prove that your inventory, even if aged, is consistently converted to cash within your normal operating cycle. By showing that your inventory management is a controlled, predictable system, you dismantle the buyer's argument that your aged inventory is a risk that justifies a valuation discount.