How do we strategically manage our accounts receivable and accounts payable cycles on our exit runway to establish a favorable historical net working capital baseline before we sign a letter of intent?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common areas where buyers attempt to reduce your cash at close. The peg is typically calculated as an average of your working capital over the twelve months preceding the transaction. If your working capital is artificially high during this period due to slow collection of receivables or rapid payment of payables, your target peg will be set high, forcing you to leave more cash in the business at close.

To prevent this, you must strategically manage your cash cycles at least twelve months before signing a Letter of Intent. Start by tightening your accounts receivable collections. Implement a disciplined system to follow up on overdue invoices immediately, reducing your Days Sales Outstanding to a consistent, predictable level.

Next, look at your accounts payable. If you are paying your vendors early, stop. Transition your payments to match your actual contract terms, preserving your cash on hand.

By establishing a consistent, optimized rhythm for your receivables and payables during your exit runway, you set a realistic and favorable working capital baseline. This baseline proves to the buyer that your business operates efficiently and prevents them from setting an inflated working capital peg that drains your hard-earned cash at close.