The buyer wants to set our Net Working Capital peg using a twelve-month rolling average, but our accounts receivable has been artificially high due to collections issues that we have recently resolved. How do we negotiate a working capital target that does not force us to leave excess cash on the table at closing?

Question

Tyler Smith · Accepted Answer

The Net Working Capital peg is a critical but often overlooked element of deal structure. If the buyer sets the peg too high, you will be forced to leave extra cash in the business at closing, effectively reducing your net proceeds. If your historical accounts receivable was artificially high due to poor collections, a rolling twelve-month average will penalize you. We recommend addressing this operational issue immediately using your EOS metrics. Task your finance seat with a Rock to clean up your accounts receivable and bring your days sales outstanding down to your industry standard. You must prove to the buyer that your current, optimized working capital cycle is the true baseline, not the historical average. When negotiating the LOI, insist on a Net Working Capital target that reflects this normalized operating cycle. Present a clear analysis showing how your operational improvements have permanently reduced the working capital needed to run the business. If the buyer refuses, negotiate a true-up mechanism that pays you back for any excess working capital delivered at closing. Clean up your balance sheet months before you sign an LOI so you do not leave your hard-earned cash behind.