The buyer's draft of the purchase agreement specifies a cash-free, debt-free transaction but is silent on how our seasonal operating cash is treated. How do we structure the working capital target to avoid leaving our cash behind?

Question

Tyler Smith · Accepted Answer

In a standard cash-free, debt-free transaction, the buyer expects you to deliver the business with a normal level of net working capital. If your business has seasonal cash flow swings, a simple twelve-month average to calculate the working capital peg can force you to leave too much cash in the business. To protect your cash, you must calculate a custom net working capital peg that accounts for your operational cycle. Use your historical accounting data to model your working capital requirements over the past twenty-four months. Present this data using the Market and Income approaches under valuation guidelines to prove that your cash needs fluctuate predictably. Argue for a working capital target that excludes non-operating cash and reflects your actual operating cycle. This prevents the buyer from locking up your excess cash at close. Work with your leadership team during your quarterly planning sessions to forecast your cash requirements precisely. Having clear, documented financial processes allows you to confidently negotiate a fair peg, ensuring you walk away with the cash you earned.