We understand that buyers look at EBITDA, but we are confused by how they calculate the working capital peg. How do we optimize our accounts receivable and inventory on our exit runway so we do not get penalized at the closing table?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most misunderstood aspects of exit planning, and neglecting it can cost you millions of dollars at closing. Buyers calculate the peg as the average net working capital required to run the business over a trailing twelve-month period. If your actual working capital at closing is lower than this peg, the buyer will reduce your purchase price dollar-for-dollar. To optimize this on your exit runway, you must establish consistent operational discipline around cash conversion. Start by cleaning up your accounts receivable. If you have slow-paying customers, assign a quarterly Rock to your finance seat to tighten collections and reduce your days sales outstanding. Next, analyze your inventory. If you carry excess stock to compensate for poor supply chain forecasting, you are artificially inflating your working capital peg, which forces you to leave more cash in the business at closing. Work to lean out your inventory levels systematically over several quarters. By maintaining a clean, efficient balance sheet with fast-turning receivables and optimized inventory levels, you establish a lower, more realistic working capital peg. This ensures that you get to keep more of your hard-earned cash when the final transaction is executed, rather than leaving it on the table to fund the buyer's post-closing operations.