We are concerned about how a buyer will calculate our net working capital target at closing. How do we manage our accounts receivable, inventory, and accounts payable on our exit runway to establish a clean working capital peg that does not leave our cash trapped in the business?

Question

Tyler Smith · Accepted Answer

One of the most common ways owners lose money at the closing table is through net working capital adjustments. Buyers structure deals on a debt-free, cash-free basis, but they require you to leave a normal level of working capital in the business to fund daily operations. If your working capital is poorly managed, the buyer can set an artificially high peg, forcing you to leave your hard-earned cash behind. To protect your cash, you must optimize your working capital cycle on your exit runway. Start by tightening your accounts receivable collection. Use your weekly EOS Scorecard to track your average days sales outstanding and make it a consistent Rock to bring that number down. Next, clean up your inventory. Identify slow-moving or obsolete inventory and write it off or liquidate it now. Keeping bloated inventory on your books falsely inflates your working capital target, which you will be forced to deliver at close. Finally, manage your accounts payable to reflect normal industry terms. Do not artificially stretch your payables or accelerate your collections right before a sale, as buyers will normalize these numbers during due diligence anyway. By maintaining a clean, highly efficient cash conversion cycle for at least twelve to eighteen months before going to market, you establish an accurate, defensible working capital peg that keeps your cash where it belongs: in your pocket.