We understand that we will need to leave a normal level of working capital in the business at closing, but we do not know how to define or protect this number. How do we manage our working capital cycles on our exit runway so we do not end up giving away our cash to the buyer?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common battlegrounds in a business sale. Buyers will try to set a high working capital target to force you to leave excess cash or receivables in the business at closing. To protect your hard-earned cash, you must optimize and document your working capital cycles on your runway.

Begin by tracking your working capital metrics on your weekly scorecard. Monitor your days sales outstanding, which measures how quickly you collect receivables, and your days payable outstanding, which measures how you manage vendor payments. By shortening your collection cycle and extending your payment terms, you run a highly efficient operation that requires less cash to operate.

Next, work with an experienced advisor to calculate your trailing twelve-month average working capital. By establishing a consistent, historical baseline under normal operating conditions, you can defend a realistic working capital peg during negotiations.

Proving that your working capital cycles are tight and predictable prevents the buyer from arguing that your business requires an excessive cash cushion, ensuring you keep more money in your pocket at closing.