M&A advisors frequently mention that buyers use the net working capital peg to claw back money at closing. How do we establish working capital discipline two years before an exit to protect our cash at close?

Question

Tyler Smith · Accepted Answer

Net working capital is the difference between your operational current assets and current liabilities, excluding cash and short-term debt. Buyers require a normal level of working capital delivered at closing so the business can operate uninterrupted on day one without them injecting fresh cash. The net working capital peg is the agreed benchmark, usually calculated as the trailing twelve-month average. If your actual working capital at closing falls below that peg, your purchase price is reduced dollar for dollar.

Poor working capital management during your exit runway can quietly forfeit millions of dollars. To protect yourself, establish disciplined cash conversion hygiene twenty-four months out.

Start with accounts receivable. Review days sales outstanding weekly on your Level 10 Meeting Scorecard. Enforce strict collection procedures, resolve disputed billings instantly, and tighten customer payment terms. Erratic collections artificially inflate your working capital peg while leaving actual cash uncollected.

Next, manage inventory and work-in-progress tightly. Excess or obsolete inventory sitting on your balance sheet artificially inflates historical working capital averages. If a buyer identifies dead stock during diligence, they will write it down, forcing you to make up the difference in cash.

Finally, normalize accounts payable. Do not artificially delay vendor payments before closing to accumulate cash. Professional M&A buyers identify stretched payables immediately and normalize them against you. Run your payables and receivables on a consistent, predictable cycle so your trailing twelve-month average accurately reflects stable operational needs.