How to Protect Your Cash at Closing

You have agreed on a price. The due diligence is done. You are 72 hours away from the wire transfer—and suddenly, the deal is on life support. The culprit? Working Capital. In the world of M&A, working capital is often the “war zone” of the final hour. To a seller, it feels like the buyer is trying to shave money off the price. To a buyer, it’s about ensuring the business has enough “fuel” to run on Day 1. If you want to succeed in maximizing sale value, you must address this early.

What is Working Capital? (The “Gas in the Tank” Analogy)

Think of your business as a car you are selling. The purchase price covers the car itself, but the buyer expects there to be enough gas in the tank to drive it home.

In business terms, Working Capital = Current Assets (Cash, Inventory, Accounts Receivable) minus Current Liabilities (Accounts Payable, Accrued Expenses).

The buyer needs this “operational fuel” to pay employees and suppliers before the first new invoices are collected. If you “drain the tank” by collecting every penny of your Accounts Receivable (AR) right before you hand over the keys, the buyer has to inject their own cash immediately. They will rightfully demand a price reduction to compensate for that.

Establishing “The Peg”

To prevent a fight, both parties must agree on “The Peg.” This is a target dollar amount of working capital the seller agrees to leave in the business at closing.

Because most businesses are seasonal, we don’t just look at yesterday’s balance sheet. Instead, we typically use a 12-month or 24-month rolling average to find a “normalized” number.

Common Conflict Zones to Watch For

• Excess Cash: Usually, cash is “excluded.” The seller keeps the cash in the bank, but they must leave enough behind to cover the immediate bills. Anything above the required operating cash is yours to take as proceeds.
• Accounts Receivable (AR): This is the biggest friction point. If the “Peg” requires $100k in assets and you only have $80k in AR at closing, you must leave $20k in cash to make up the difference.
• The Gift Card & Deposit Trap: If you have collected $50,000 in customer deposits or gift cards, that is “unearned revenue.” You have the cash, but the buyer has the obligation to do the work. Usually, you have to leave that cash behind so the buyer can fulfill those orders.

The 90-Day “True-Up”

No matter how hard you prepare, the numbers on closing day are often estimates. That is why a standard exit strategy includes a “90-Day True-Up.”

Three months after the sale, the buyer and seller sit down to look at the actual numbers. If the AR you left behind turned out to be “bad debt” that couldn’t be collected, the price is adjusted downward. If you left more value than required, the buyer writes you a check for the difference.

Why You Must Address This in the LOI

The biggest mistake is leaving working capital “for the lawyers to handle later.” By the time the lawyers get involved, emotions are high and the deal is fragile.

A professional deal should define the working capital target and the exact formula used to calculate it directly in the Letter of Intent (LOI). When everyone knows the rules of the game from the start, there is no “war”—just a math equation.

So, what is the right choice?

Clean up your accounting at least a year before you sell. Accrual-based accounting makes these calculations transparent and leaves very little room for a buyer to manipulate the numbers to their advantage.

Are you worried that a “Working Capital War” might cost you thousands at the closing table? I can help you calculate your “Peg” now and build a defensive strategy to protect your proceeds. Contact me today for a confidential review of your balance sheet before you sign an LOI.

Photo by Joel Timothy on Unsplash