The buyer is using a standard twelve-month rolling average to calculate our net working capital peg, which penalizes us for a permanent cash reduction from our inventory optimization efforts. How do we renegotiate this peg to avoid leaving excess cash on the table?

Question

Tyler Smith · Accepted Answer

Using a trailing twelve-month straight average to calculate your net working capital peg is a standard buyer tactic, but it unfairly penalizes owners who have recently optimized their inventory and operations. If you have permanently reduced your working capital requirements, using a historical average forces you to leave too much cash in the business at close.

To renegotiate this peg, you must present a detailed, adjusted book value calculation that reflects your current operating reality. Do not rely on emotional arguments. Instead, build a regression-based working capital analysis that shows the direct correlation between your optimized inventory levels and your current sales volume.

Prove that your lower inventory level is a structural improvement rather than a temporary dip. Show that your new processes, possibly powered by automated inventory tracking or faster supplier cycles, allow you to run the business smoothly with less cash.

Propose a customized, weighted average that places greater emphasis on the last three to six months of operations rather than a straight twelve-month average. This ensures the peg is based on your modern, efficient operational baseline. By defending this position with clean data, you prevent the buyer from locking up your excess liquid cash in the business post-close.