Our advisors mentioned that our working capital management will heavily impact our final net proceeds during a sale. How do we clean up and optimize our working capital cycle on our exit runway?

Question

Tyler Smith · Accepted Answer

Many business owners focus entirely on EBITDA multiples and completely ignore working capital, only to get a nasty surprise at the closing table. During a transaction, a buyer will establish a working capital peg based on your historical averages. If your working capital is bloated because of slow collections or excess inventory, you will be forced to leave a massive amount of cash in the business at close to meet that peg. To protect your net proceeds, you must aggressively optimize your working capital cycle on your exit runway. Start by using your weekly EOS® Scorecard to track and improve your Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO). Task your leadership team with establishing tight collections policies and renegotiating vendor payment terms to increase your Days Payable Outstanding (DPO). By running a lean working capital cycle for twelve to twenty-four months before a sale, you establish a much lower historical working capital peg. This ensures that more of your cash remains in your pocket when the deal closes rather than being transferred to the buyer to fund daily operations.