The buyer is proposing a Net Working Capital peg based on a simple twelve-month average, but our accounts payable has been artificially low because we prepay vendors for discounts. How do we adjust the working capital calculation so we are not penalized for running an efficient balance sheet?

Question

Tyler Smith · Accepted Answer

Running a highly efficient balance sheet with prepaid vendors can penalize you in a standard Net Working Capital peg calculation if you are not careful. Because you pay your vendors faster than the industry average, your accounts payable is low, which artificially inflates your historical net working capital.

Under a standard calculation, this forces you to leave more cash in the business at closing. To prevent this, you must normalize your accounts payable to reflect standard industry terms. Under IVS 105, your valuation should reflect normalized working capital requirements, not your unique cash management strategies.

Present an adjustment that recalculates your historical accounts payable as if you paid on standard thirty-day terms. This adjustment reduces your historical working capital requirement, lowering the peg and allowing you to extract more cash at close.

Review this financial strategy with your leadership team. Your finance lead should document the exact discount terms you receive from vendors to prove that your prepayments were a discretionary choice to maximize profitability, not an operational necessity. Presenting this clear, logical adjustment ensures you are rewarded for running a tight, highly profitable operational model rather than being penalized for your efficiency.