The buyer is proposing a net working capital target based on our highest cash balances of the year, claiming it represents our operating reality. How do we use our EOS cash flow forecasting and weekly scorecard metrics to establish a fair working capital peg that does not leave our cash trapped in the business?

Question

Tyler Smith · Accepted Answer

A buyer who tries to set your net working capital target based on your highest cash balances is trying to pull cash out of your pocket at closing. The working capital peg should represent the normal, average level of working capital required to run the business, not a peak cash position. To defeat this, use your weekly EOS scorecard and cash flow forecasting tools to demonstrate your actual operating cycle. Present a rolling twelve-month historical analysis of your accounts receivable, accounts payable, and inventory. Show the average monthly balances to establish a true baseline. Next, highlight how your automated invoicing and collection tools have shortened your day's sales outstanding. This proves you need less working capital to run the business today than you did a year ago. If the buyer still insists on a high peg, demand a reciprocal adjustment mechanism. If the actual working capital at closing is higher than the peg, the purchase price must increase dollar-for-dollar. If it is lower, it decreases. To prevent them from manipulating this post-close, define exactly which accounting methodologies and specific GL accounts are included in the calculation. This level of detail, backed by your operational scorecard data, stops the buyer from converting your operational cash into a discount on the purchase price.