Buyers keep telling us their offer is on a debt-free, cash-free basis, but they also expect us to leave a normalized level of working capital in the business. How do we explain this apparent contradiction to our leadership team and plan our cash management accordingly?

Question

Tyler Smith · Accepted Answer

A debt-free, cash-free structure means you keep your cash and pay off your debts at close. However, the business must have enough fuel to run on day one. This fuel is your net working capital, defined as current assets minus current liabilities. The buyer will set a working capital peg based on your historical average. If you have unpaid vendor bills at close, that liability must be covered by accounts receivable or inventory left in the business. If your actual working capital at close is lower than the agreed-upon peg, the buyer will deduct the difference from your purchase price. You must monitor your working capital cycle closely during the sale process. Do not let your team stretch accounts payable or defer inventory purchases to artificially inflate your cash balance, as this will only trigger a post-close working capital adjustment. Keep your operational rhythms consistent to ensure a clean handoff. Educate your finance seat on this mechanism so they do not inadvertently drain the business of necessary operating cash before the transaction concludes.