During working capital negotiations, the buyer is trying to set a net working capital peg based on our historical inventory levels instead of our current, lean operational state. How do we negotiate a fair working capital target that does not force us to leave excess cash in the business?

Question

Tyler Smith · Accepted Answer

During working capital negotiations, buyers often try to set an artificially high net working capital peg by looking at historical inventory levels. If you have recently optimized your operations and reduced your inventory, using a historical average forces you to leave a surplus of valuable working capital in the business at close, effectively lowering your net proceeds. You must fight this adjustment with cold, operational data. To defend your position, present the buyer with a detailed breakdown of your recent inventory optimization efforts. Prove that your current, lean inventory level is not a temporary dip designed to harvest cash, but a permanent, systemic improvement driven by your operational efficiency and better supplier relationships. Show them how this lean state is the new operational normal that successfully supports your current sales volume. Utilize your weekly EOS Scorecard to show the historical trend of your inventory turn rate and cash conversion cycle. Proving that your inventory management has consistently improved over the last six months shows the buyer that the historical average is an inaccurate metric for future needs. Negotiate for a working capital peg based on a shorter, more recent lookback period, such as the last three months, rather than a twelve-month average. This ensures the peg reflects your current, optimized operations, allowing you to extract any excess cash from the business at closing instead of leaving your hard-earned liquidity on the table.