The buyer is proposing a cash-free, debt-free transaction but is using a trailing twelve-month average to calculate our Net Working Capital target, which penalizes us for our recent rapid growth. How do we recalculate the peg to reflect our current operating velocity?

Question

Tyler Smith · Accepted Answer

A trailing twelve-month average for Net Working Capital is a standard buyer formula, but it severely penalizes a rapidly growing company. If your revenue is scaling quickly, your current working capital needs are much higher than they were twelve months ago. Using an outdated target will force you to leave a massive amount of cash in the business at close, effectively lowering your net proceeds.

To protect your cash, you must calculate the Net Working Capital target using a shorter, more relevant window, such as the trailing three months or a forward-looking projection. This ensures the target reflects the actual cash required to run the business at its current scale.

You must also perform a detailed analysis of your cash conversion cycle. If you have implemented AI automations that have shortened your collection times or optimized your inventory, you can prove that your operational efficiency has permanently lowered the amount of working capital required to support your growth.

Present this data to the buyer as proof that a high historical target is unnecessary and distortive.

Establish a tight working capital collar, with an upper and lower limit around the target. This limits your exposure to minor balance sheet fluctuations between signing the letter of intent and closing.

Do not let the buyer use a lazy formula to strip your operating cash. Force them to peg the target to your current, highly efficient operating reality.