The buy-side accountants are calculating our Net Working Capital target in a way that ignores our accounts payable, which would force us to leave too much cash in the business at close. How do we use the concept of Reduced Gross Substantial Value to defend our cash position?

Question

Tyler Smith · Accepted Answer

Buyers often try to manipulate the Net Working Capital peg to force you to leave excess cash behind, which effectively lowers their net purchase price. To counter this, you must understand the distinction between Gross Substantial Value and Reduced Gross Substantial Value. Gross Substantial Value represents the total market value of your business assets. Reduced Gross Substantial Value, however, subtracts cost-free debt, such as accounts payable and accrued liabilities, from that total asset value. By focusing on Reduced Gross Substantial Value, you establish that your working capital needs are naturally supported by your ongoing operational liabilities, not just your cash and accounts receivable. When negotiating the working capital target, insist that the calculation of current liabilities includes all accounts payable and accrued expenses. If the buyer tries to exclude these liabilities while keeping your accounts receivable in the peg, they are creating an artificial deficit that you will have to fund with cash at closing. Support your position by presenting your historical cash conversion cycle. Use your EOS® Scorecard data to show that your payment terms with vendors are stable and that your accounts payable are a reliable, cost-free source of operational funding. This proves that you do not need an inflated cash cushion to run the business, allowing you to extract your hard-earned cash at close.