Our inventory levels fluctuate wildly due to global supply chain hedging. How do we prevent the buyer from using a flat twelve-month net working capital average that penalizes us for holding cash-generating raw materials?

Question

Tyler Smith · Accepted Answer

Using a simple twelve-month average to set a net working capital peg is a classic buyer trick to force you to leave excess cash in the business at closing. If your inventory levels spike because you opportunistically purchased raw materials to hedge against inflation or supply chain disruptions, a flat average will artificially raise the required working capital target.

To fight this, you need to conduct a highly detailed, daily or monthly working capital analysis over a twenty-four month period. Separate your base inventory from your strategic, non-recurring inventory investments. Prove to the buyer that these temporary spikes in raw materials directly protected your gross margins and drove the very EBITDA they are using to value the business.

Align this with your operational execution. Show the buyer your V/TO® and how supply chain management is managed as a quarterly Rock by your operations leader. When you prove that your inventory management is a sophisticated cash-conversion strategy rather than operational inefficiency, you can negotiate a seasonal peg or a cash-free, debt-free working capital adjustment that accurately reflects your business cycle and keeps cash in your pocket at close.