I keep hearing that buyers will use a Net Working Capital adjustment at closing to claw back cash. How do we optimize our cash cycle and receivables today so we do not get penalized during final negotiations?

Question

Tyler Smith · Accepted Answer

Net Working Capital, or NWC, is one of the most common battlegrounds in a transaction. Buyers want to ensure that they are acquiring a business with enough gas in the tank to run day-to-day operations on day one. They will look at your average historical working capital over the twelve months prior to closing to establish a baseline target. If your collections are lazy and your accounts receivable are bloated during those twelve months, your baseline target will be artificially high. This means you will be forced to leave more cash or working capital in the business at closing, effectively lowering your net proceeds. To prevent this, you must aggressively manage your cash cycle starting at least eighteen months before you go to market. This is an operational discipline that belongs on your weekly Scorecard. Set strict Rocks to improve your cash conversion cycle. Tighten your billing terms, enforce prompt collections, and systematically eliminate old or disputed receivables. Keep your inventory lean if you are a physical goods business. By establishing a highly efficient, lean working capital history, you set a lower target peg for the deal. This ensures that when the transaction closes, more of the cash on your balance sheet goes into your pocket rather than staying with the buyer to fund their new operations.