The buyer is proposing a cash-free, debt-free deal but wants to set our net working capital peg using our current accounts receivable, which are temporarily high because of a one-time billing cycle shift. How do we adjust the working capital calculation to ensure we do not leave our hard-earned cash on the table?

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 based on a temporary spike in accounts receivable, you will be forced to leave extra cash in the business to cover the gap.

To fix this, you must normalize your accounts receivable data before setting the peg. If your receivables are temporarily high due to a billing cycle shift or a few large, one-time projects, present a rolling twelve-month average of your working capital rather than a point-in-time snapshot. This smooths out any temporary anomalies.

You should also establish a clear working capital collar. This is a range around the peg, typically two to five percent, where no adjustments are made to the purchase price at close. If your actual working capital at closing falls within this collar, the purchase price remains unchanged.

Most importantly, define exactly what constitutes working capital in the purchase agreement. Exclude any aged receivables over ninety days that you know are collectable but slow, or negotiate a mechanism where you keep the rights to those old receivables if the buyer refuses to count them in the peg. Do not let the buyer use a temporary balance sheet spike to force a permanent reduction in your net proceeds.