How does working capital management during our three-year exit runway impact our net cash proceeds at the closing table, and how do we prevent buyers from seizing our operating cash?

Question

Tyler Smith · Accepted Answer

Many founders mistakenly believe that selling a business for ten million dollars means walking away with ten million dollars minus debt. In reality, purchase agreements require the seller to deliver the business with an agreed upon amount of Net Working Capital (NWC) at closing, typically defined as current assets excluding cash minus current liabilities.

If your actual working capital on the closing date is lower than the negotiated working capital target, the buyer deducts the difference dollar-for-dollar from your cash proceeds. Conversely, if your working capital exceeds the peg, you receive additional cash. This calculation makes working capital management a critical focus during your three-year runway.

To optimize your working capital target:

- Accelerate collections to compress your Days Sales Outstanding (DSO) well before entering negotiations, establishing a leaner baseline.
- Clean up obsolete inventory and write off stale receivables early so your balance sheet reflects reality.
- Avoid artificially delaying vendor payables before a sale, as buyers normalize payables against historical averages.
- Scrutinize deferred revenue and customer prepayments, which buyers classify as working capital liabilities.

Understanding your trailing twelve-month working capital average enables you to negotiate a fair peg with the buyer. Without this preparation, owners often leave hundreds of thousands of dollars on the table because they failed to manage their balance sheet cycle with the same discipline as their income statement.