We have achieved massive efficiencies in our working capital cycle by using AI-driven receivables collections, but the buyer's Quality of Earnings report is trying to use a trailing twelve-month average that forces us to leave excess cash in the business. How do we renegotiate the net working capital peg to capture this structural efficiency?

Question

Tyler Smith · Accepted Answer

A standard trailing twelve-month average for a net working capital peg penalizes companies that have structurally improved their operational efficiency. If your AI-driven receivables collections have permanently shortened your cash conversion cycle, your historical working capital requirements are no longer representative of your current operational reality. Leaving that excess cash in the business at close is equivalent to giving the buyer a free price reduction.

You must challenge their Quality of Earnings methodology by using a regression-based valuation model or a targeted working capital analysis. Under IVS 105, the Market and Income approaches require adjustments for non-operating assets and liabilities. Argue that the cash freed up by your AI systems is redundant operational cash that should be treated as excess cash and distributed to the sellers at closing.

Present a clean, data-driven analysis showing the structural step-down in your days sales outstanding over the last four months. Prove that this is a permanent operational improvement, not a temporary collection spike.

Suggest a modified working capital peg based on a three-month rolling average rather than twelve months. To ease the buyer's anxiety, offer a temporary post-close adjustment period where you escrow a small portion of the cash. If the working capital requirements spike back to historical levels within ninety days, the escrow is adjusted. This direct, quantitative approach protects your cash while demonstrating the real value of your automated workflows.