During the deal structuring phase, the buyer is proposing a net working capital target based on a simple twelve-month historical average, which ignores our recent shift to upfront client billing. How do we redefine the working capital peg to avoid leaving our cash trapped in the business at close?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common places where sellers lose money at the closing table. If a buyer sets the target net working capital too high by using a simple twelve-month average, you will be forced to leave a significant amount of your own cash in the business to cover that target at close.

To defend a lower, more accurate working capital peg, you must show how your operational changes have optimized your cash-conversion cycle. If you have recently transitioned to upfront client billing or shortened your collections process, your historical average will artificially inflate the required working capital.

Present your weekly Scorecard history from the past year to show the clear, downward trend in your accounts receivable days. Explain the operational changes your leadership team implemented to achieve this efficiency, proving that your current lower working capital requirement is the new normal.

By using real-time operational data rather than outdated historical averages, you can negotiate a dynamic working capital peg. This ensures that you get to keep and distribute your excess cash at closing instead of leaving it on the table for the buyer's benefit.