We recently automated our billing and collections, which cut our accounts receivable cycle in half and permanently reduced our working capital needs. The buyer is proposing a working capital peg based on a trailing twelve-month average, which would force us to leave significant cash in the business. How do we defend a lower peg?

Question

Tyler Smith · Accepted Answer

Using a standard twelve-month historical average for your net working capital peg is a classic trap when your operational efficiency has recently improved. If you automated your collections, your current working capital needs are permanently lower than they were six months ago. Accepting a historical average means you will have to leave excess cash on the table to meet an inflated target.

To defend your position, you must prove that this reduction in working capital is structural and permanent, not a temporary fluctuation. Present a rolling three-month and six-month working capital analysis alongside your historical twelve-month data. Highlight the exact date you implemented the automated billing systems on your scorecard.

Show the buyer the direct correlation between your automation launch and the drop in your Days Sales Outstanding. Prove that your business now requires less working capital to run the exact same level of revenue. Under M&A standards, the working capital peg is designed to reflect the normal operations of the business going forward, not a historical period that is no longer representative of the operating model.

Demand that the peg be calculated using a weighted average of the last three to four months, reflecting your new operating reality. If the buyer resists, offer to set a lower peg with a true-up mechanism that adjusts ninety days post-close based on actual performance. This ensures you do not get penalized for running a highly efficient, automated cash cycle.