The buyer is using our high historical Accounts Payable balance, which is temporarily inflated because we use a large network of subcontracted field labor, to argue for an artificially low Net Working Capital target. How do we adjust the working capital formula to protect our closing cash?

Question

Tyler Smith · Accepted Answer

Buyers frequently look for anomalies in your balance sheet to manipulate the Net Working Capital peg in their favor. If your business relies heavily on subcontractors, you likely carry a high Accounts Payable balance because you pay those vendors on a delay. A high AP balance artificially reduces your calculated net working capital, which can lead to an unfairly low target peg.

To protect your cash at close, you must normalize your working capital calculation. You must argue that subcontractor payables are a direct variable cost of project delivery, not standard operational working capital.

Present a rolling analysis of your working capital that excludes these project-specific subcontractor payables, showing how your core operating cash, accounts receivable, and prepaid expenses actually behave. Use your weekly Scorecard historical data to demonstrate the direct correlation between project cash inflows and subcontractor outflows. This proves that your high AP is a temporary matching of project revenues and expenses, not a structural funding mechanism for the business.

By demonstrating that this cash flow cycle is predictable and tightly managed, you can negotiate an adjusted working capital definition in the definitive agreement. This ensures that you do not leave excess cash in the company at close to cover an artificially low target. Protect your cash at close by forcing the buyer to recognize the difference between standard operating liabilities and project-specific subcontractor cycles.