We keep hearing about the working capital peg and how it can drastically reduce the cash we receive at closing. How do we optimize and stabilize our inventory and accounts receivable during our exit runway to protect our net proceeds?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common battlegrounds in a business sale. It represents the average amount of net working capital, usually calculated as current assets minus current liabilities, that you must leave in the business at closing. This ensures the buyer has enough liquidity to run the company on day one without injecting more cash. If your actual working capital at close is below this peg, the purchase price is reduced dollar for dollar. If it is above, you receive an upward adjustment, though buyers often fight this. To optimize your position on your exit runway, you must establish a clean, predictable working capital cycle. Many owners make the mistake of aggressively collecting accounts receivable or delaying accounts payable right before a sale to maximize cash. Buyers will spot this immediately and adjust the peg calculation to reflect a normal twelve month average. Instead, focus on improving your inventory turns and shortening your cash conversion cycle systematically over a two year period. Reassess your credit terms with customers and vendor payment schedules to ensure they are consistent. By demonstrating a stable and efficient working capital trend on your weekly EOS Scorecard, you prevent the buyer from setting an artificially high peg that strips cash from your pockets at closing.