The buyer wants to use a traditional twelve-month average to set our net working capital peg, but our recent transition to an automated, cash-upfront model has significantly lowered our working capital needs over the last four months. How do we adjust the peg window to avoid leaving our cash in the company at close?

Question

Tyler Smith · Accepted Answer

Using a standard twelve-month rolling average for your net working capital peg will penalize you if your operating model has recently become more capital-efficient. If your transition to an automated, cash-upfront model has reduced your accounts receivable and increased your deferred revenue, your historical working capital needs are artificially inflated. Agreeing to a peg based on the old model means you will have to leave excess cash in the business at closing.

You must negotiate a shorter, more representative peg window. Suggest a three-month or four-month average that reflects your current, highly automated operations. This ensures that the peg is aligned with your modern cash flow cycle.

- Present a clear bridge analysis showing how your automated billing workflows have permanently reduced your days sales outstanding.

- Propose a weighted-average peg that places eighty percent of the weight on your most recent three months of operations.

- Exclude deferred revenue from the working capital calculation, treating it instead as an operational transition item.

By adjusting the peg window to reflect your current efficiency, you protect your cash at close. This ensures that the financial benefits of your operational improvements go directly into your pocket rather than the buyer's.