We want to avoid a common trap where a buyer demands an unexpectedly high working capital peg at closing. How do we optimize our working capital metrics on our exit runway to maximize our net cash proceeds?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most heavily negotiated numbers in an acquisition, and preparation must begin years before you sign a letter of intent. Buyers will look at your trailing twelve-month average of working capital to set the target you must deliver at closing. If your working capital is bloated due to slow collections or excess inventory, you will be forced to leave a massive amount of cash in the business when you sell. To optimize this, task your Integrator with systematically improving your working capital efficiency as a core operational Rock. Focus on accelerating your accounts receivable collections and extending your accounts payable cycles within reasonable vendor agreements. Use your weekly Scoreboard to track Days Sales Outstanding and Days Payable Outstanding. Your goal is to establish a lean, highly efficient baseline over the twelve to twenty-four months preceding your sale. By presenting a clean, consistent, and optimized working capital history, you prevent the buyer from arguing that your business requires a massive cash cushion to operate, ultimately putting more cash in your pocket at closing.