Buyers keep talking about net working capital targets and quality of cash flow, but our focus has always been purely on maximizing EBITDA on paper. How do we tighten our working capital and cash conversion cycle during our exit runway so we do not forfeit millions at closing?

Question

Tyler Smith · Accepted Answer

Many owners celebrate an agreed purchase price only to get crushed at closing because they ignored net working capital. In almost every purchase agreement, the buyer demands a normalized peg of net working capital delivered at closing, including accounts receivable, inventory, and prepaid expenses minus accounts payable and accrued liabilities. If your working capital falls short of the peg on closing day, the purchase price is reduced dollar-for-dollar from your wire.

Paper EBITDA does not translate to cash if your cash conversion cycle is bloated. A sixty-day average collection period combined with vendor payments on fifteen-day terms means you are financing your customers with your own balance sheet. Buyers view this as an operational inefficiency that requires excess capital reserves.

To fix your working capital discipline during your two-year runway:

- Tighten your receivables by putting collection metrics on your weekly Scorecard. Escalate past-due accounts in your weekly Level 10 Meeting and enforce strict credit terms.
- Renegotiate vendor payables to forty-five or sixty days to preserve operating cash.
- Audit inventory turns and write off slow-moving or obsolete stock instead of letting it sit as an artificial asset on your ledger.
- Stop using customer deposits to fund ongoing operations. Segregate unearned revenue so it does not distort your cash position.

When your cash conversion cycle is short and predictable, your Quality of Earnings audit demonstrates real cash generation rather than accounting fiction. That certainty prevents post-LOI renegotiations and protects your net proceeds at closing.