Buyers are going to calculate a net working capital target during negotiations, and we have no idea how our operational inventory and accounts receivable cycles will impact this number. How do we optimize our working capital metrics on our exit runway so we do not lose millions at the closing table?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common places where business owners lose money at the closing table. Buyers will look at your trailing twelve-month average of inventory, accounts receivable, and accounts payable to establish a normal level of working capital that you must leave in the business at closing. If your operational cash cycle is sloppy, you will end up leaving cash behind or facing a post-closing purchase price adjustment.

To protect yourself, you must optimize your working capital cycle on your exit runway. Start by adding key working capital metrics to your weekly Scorecard. You should track Days Sales Outstanding, Days Inventory Outstanding, and Days Payable Outstanding on a regular basis.

Assign clear accountability for these metrics on your Accountability Chart. Your finance leader must own the accounts receivable collections process and run it aggressively. Your operations leader must manage inventory levels tightly to ensure you are not sitting on dead stock that bloats your working capital target.

During your quarterly planning sessions, set specific Rocks to clean up outstanding receivables and liquidate slow-moving inventory. Address any systemic operational bottlenecks that delay billing or shipping during your weekly Level 10 Meeting™.

By consistently tracking and improving these metrics over the years leading up to your exit, you establish a lean, efficient working capital baseline. When the buyer calculates the working capital target, they will base it on a highly optimized operation, ensuring you walk away with the maximum amount of cash at closing.