Our Step by Step Exit Business Integrity Review highlighted that our valuation is suppressed by a high working capital requirement due to our slow inventory turns. How do we use our weekly Level 10 Meeting™ and quarterly Rocks to optimize our working capital baseline before we enter the Quality of Earnings phase?

Question

Tyler Smith · Accepted Answer

A high net working capital target in your purchase agreement will lock up your cash at closing, effectively reducing your net proceeds. If your inventory turns are slow, a buyer will demand a larger working capital peg, forcing you to leave more cash in the business. To fix this, you must treat your inventory turns as a critical operational risk. Use your weekly Level 10 Meeting™ to track inventory days outstanding as a core scorecard metric. If this number trends upward, use the IDS® process to identify the root cause immediately, whether it is over-purchasing or bottlenecks in your fulfillment process. Next, assign a quarterly Rock to your operations leader to optimize your supply chain. This Rock should focus on renegotiating vendor payment terms to extend your accounts payable, while implementing just-in-time inventory processes to reduce raw material holding costs. By improving these operational metrics, you will naturally lower your average working capital requirement. When the buyer's Quality of Earnings firm reviews your books, you can present a trailing twelve-month trend showing a declining working capital need. This allows you to negotiate a lower working capital peg in the definitive agreement, ensuring you pocket more cash at close instead of leaving it on the table.