We want to maximize our cash-at-close when we sell, but our accounts receivable collection cycle is slow and our accounts payable terms are short. How do we optimize our working capital cycle on our exit runway so we do not leave a massive pile of working capital behind for the buyer?

Question

Tyler Smith · Accepted Answer

In almost every business sale, the buyer will require you to leave a normal level of net working capital in the business at closing. If your cash conversion cycle is inefficient, you will be forced to leave a significantly larger portion of your cash behind to fund the ongoing operations, effectively lowering your net proceeds.

To prevent this, you must spend your exit runway systematically optimizing your working capital cycle. Start by targeting your accounts receivable. Implement strict collection processes, shorten your payment terms with customers, and automate payment reminders. Your goal should be to drive down your Days Sales Outstanding (DSO) to well below your industry benchmark.

Simultaneously, negotiate longer payment terms with your vendors to increase your Days Payable Outstanding (DPO). This allows you to hold onto cash longer without damaging vendor relationships.

By improving your collections and extending your payables, you reduce the overall amount of working capital required to run the business. This creates a highly efficient cash conversion cycle. When the buyer calculates the working capital peg during due diligence, they will base it on your optimized historical performance. This directly reduces the amount of cash you must leave in the company at close, putting more money in your pocket on deal day.