The buyer's working capital calculation uses a twelve-month straight average, which penalizes us because our inventory costs spiked recently due to permanent supply chain optimization. How do we calculate an adjusted book value or customized working capital peg to reflect this new baseline?

Question

Tyler Smith · Accepted Answer

A standard twelve-month straight average for net working capital assumes your business operates in a static environment. If you have recently optimized your supply chain by purchasing bulk inventory to lock in lower pricing, using a simple historical average will force you to leave too much cash or inventory in the business at close, effectively lowering your purchase price.

To correct this, you must build a customized working capital peg that reflects your new operational reality. First, calculate your Adjusted Book Value by re-evaluating your current inventory to its actual market value and utility. Show the buyer that this inventory is not slow-moving or obsolete, but rather highly liquid stock that is critical for driving future revenue.

Second, propose a weighted average or a shorter three-month look-back period for your working capital calculation. This ensures the peg reflects your current operating model rather than historical phases before your supply chain was optimized.

Third, link this inventory strategy directly to your sales forecast. Prove that this upfront investment in working capital directly supports your near-term pipeline. By showing that this inventory is an active revenue generator rather than an unnecessary cash drag, you can negotiate a fair working capital peg that protects your cash-at-close.