We carry a significant amount of slow-moving inventory and aged accounts receivable that we consider assets. How do we clean up these balance sheet items during our runway so they do not become major write-downs during the buyer's net working capital peg negotiation?

Question

Tyler Smith · Accepted Answer

A classic trap for founders during a transaction is the net working capital peg. Buyers will conduct a detailed analysis of your working capital over the previous twelve months to establish a baseline. If your balance sheet is inflated with bad debt or obsolete inventory, the buyer will demand write-downs, which directly reduces the cash you receive at closing. Do not wait for the buyer's Quality of Earnings audit to uncover these issues. You must clean up your working capital during your runway. First, aggressively address your aged accounts receivable. If you have invoices outstanding past ninety days, assign a specific Rock to your finance team to collect or write them off. Establish a strict credit policy and automate your collections process to keep your Days Sales Outstanding within healthy industry benchmarks. Second, audit your inventory. Identify slow-moving or obsolete items and liquidate them, even if it means taking a short-term loss. A clean, fast-turning inventory is far more attractive to a buyer than an inflated, dusty warehouse. Use structured Thinking Time to analyze your working capital cycles. Ask yourself: How might we optimize our billing terms so that we collect cash faster without hurting our customer relationships? By presenting a highly efficient balance sheet with zero collections friction and clean inventory, you prevent the buyer from using working capital adjustments as a weapon to chip away at your purchase price.