Key takeaways
- WC adjustments affect final proceeds in ~70% of middle market deals, with an average delta of $350–750K from the initially agreed peg, most founders discover this after LOI when negotiating leverage is gone
- Sellers who proactively present a working capital analysis and defend a specific normalized level achieve a final peg 8–12% lower than sellers who leave the WC discussion to late-stage negotiation
- A 15-day DSO improvement on $20M revenue generates ~$820K of incremental closing proceeds when reflected in the trailing 12-month WC average
- DPO optimization is often overlooked: extending vendor payment terms from 15 to 30 days on $3M annual payables improves WC by approximately $165K with no operational cost
- Undocumented WC improvement is discounted, a buyer who sees WC drop $600K in six months without explanation adjusts the peg upward to the historical average
In this article
Operating diagnosis
Why working capital is a closing proceeds issue, not just an operations issue
For adjacent context, compare this with Pricing Discipline in the Middle Market: How to Build a System That Holds; the strongest operators connect these topics instead of treating them as separate workstreams.
Operator Checklist
- Name the metric, process, or decision this issue affects.
- Assign a single owner with authority to change the process.
- Pull the last 12-24 months of data and identify the pattern, not just the latest month.
- Choose one corrective action that can be tested in the next 30 days.
- Review the result in the next management cadence and document the decision.
Most founders understand working capital as an operational metric: are we collecting receivables fast enough, managing inventory levels, and paying suppliers on reasonable terms? What many do not understand is that in an M&A transaction, working capital is also a direct proceeds issue. The broader context of how working capital affects deal structure is covered in the working capital targets guide.
Standard deal mechanics require the seller to leave a defined level of working capital in the business at close, the "working capital peg." The peg is typically set at the trailing 12-month average of net working capital. If your normalized WC runs at $2.5M, that is the peg. If your business requires only $1.8M of WC to operate efficiently, you have been leaving $700K of potential proceeds on the table by carrying excess working capital.
$700K
Example of excess working capital that becomes deal proceeds if addressed before the trailing average is set
15–25%
Estimated excess working capital carried by typical middle market businesses
12 months
The period that matters, trailing WC average sets the peg for close
The three working capital levers
Working capital is the difference between current assets (primarily receivables and inventory) and current liabilities (primarily payables). Improving it means either reducing current assets, increasing current liabilities, or both.
For services businesses, the primary lever is days sales outstanding (DSO), how long it takes to collect receivables after billing. A business with DSO of 55 days running on $15M revenue has approximately $2.3M in receivables. Reducing DSO to 40 days brings that to $1.6M, a $700K improvement in operating cash that flows directly into the working capital comparison at close.
A 15-day DSO improvement on $20M revenue, from 55 days to 40 days, frees approximately $820K of working capital. When that improvement is reflected in the trailing 12-month WC average, it reduces the working capital peg by $820K. At close, that $820K moves from the business to the seller. On a $20M deal, this single operational change, accelerating invoice collection, which is worth more than most founders spend on M&A advisors over the entire process.
Running a pre-sale working capital improvement sprint
A 90-day WC improvement sprint targets the highest-leverage opportunity first, typically DSO reduction for services businesses. The sprint has three phases: baseline (calculate current WC by component, identify the gap versus best practice), intervention (implement the specific process changes that drive improvement), and documentation (track improvement weekly and build the narrative for the management presentation).
DPO optimization is the most underused working capital lever. Extending vendor payment terms from 15 days to 30 days on $3M of annual payables improves working capital by approximately $125K with zero operational cost. On $5M of annual payables, the improvement is approximately $205K. The conversation with a vendor takes 10 minutes. Most founders never have it.
The documentation phase is often skipped, which is a mistake. A buyer who sees your WC trend over 12 months and finds that it improved consistently, and can explain why, views that as management discipline. A buyer who finds WC magically at a lower level than expected without understanding why will be more skeptical about whether it is sustainable.
Baseline current working capital
Calculate DSO, DPO, and inventory turns for the trailing 12 months. Identify the gap between your current metrics and best practice for your industry.
Build the improvement plan
Prioritize the highest-leverage intervention. For most services businesses, that is DSO reduction. Define specific actions: billing cycle changes, collection follow-up cadence, payment term enforcement.
Implement and track weekly
Track DSO (or your primary metric) weekly. Celebrate improvement. Address obstacles as they arise. The goal is 90 days of documented progress.
Document the narrative
Build a one-page summary showing the WC trend and the specific actions that drove improvement. This becomes a management presentation exhibit.
Build a sustainable process
The improvement is most valuable if it persists. Build the collection cadence and billing discipline into your monthly operating routine.
Operating workflow scan
Turn the issue in this article into a ranked AI workflow roadmap with readiness gaps and estimated time savings.
Find the first workflow →Working capital presentation in a transaction
The working capital discussion in an M&A transaction is one of the most negotiated elements of the deal, second only to purchase price. Founders who understand their WC mechanics, can explain their historical trend, and can defend a lower-than-average peg based on documented operational improvements have a significant advantage over those who leave the conversation to their lawyers.
The most effective WC presentation shows: the trailing 12-month average by component (receivables, payables, other), the improvement trend and its drivers, the expected sustainable WC level going forward, and a comparison to industry benchmarks. A buyer who sees this has much less room to argue for a higher peg.
Working capital adjustments affect final proceeds in approximately 70% of middle market deals, with an average adjustment of $350–750K from the initially agreed peg.
Sellers who proactively present a working capital analysis and defend a specific normalized level achieve a final peg 8–12% lower than sellers who leave the WC discussion to late-stage negotiation.
DSO improvement of 15 days on a $20M revenue business generates approximately $820K of incremental deal proceeds when reflected in the trailing WC average.
Common mistakes founders make on working capital optimization.
A $14M founder-owned operator treated this issue as an operating cadence problem rather than a one-time analysis.
Management assigned a single owner, rebuilt the metric history across 18 months, and reviewed the trend monthly.
Within two quarters the team could explain the pattern, the corrective action, and the result without founder interpretation. In a buyer discussion, that documented cadence mattered more than the isolated improvement because it showed the business could manage the issue repeatedly.
Frequently asked questions
How does working capital affect my deal proceeds at closing?
The standard deal mechanic requires you to leave a defined level of working capital in the business at close, the working capital peg, typically set at the trailing 12-month average. If your normalized working capital is lower than your historical average because you improved DSO or extended payables, the peg is set lower and the difference flows to you as additional proceeds. A 15-day DSO improvement on $20M revenue generates approximately $820K of incremental closing proceeds when reflected in the trailing average.
When should I start working capital optimization before a sale process?
At least 12 months before any anticipated process. The working capital peg is based on the trailing 12-month average, so improvements made less than 12 months before close may not be fully reflected in the peg. Starting 15 to 18 months before a targeted launch gives the full improvement window time to work into the trailing average and gives you documentation of what changed and why, which is necessary to defend the lower peg in negotiation.
What is the fastest working capital improvement to implement?
DPO optimization is typically the fastest and easiest. Extending vendor payment terms from 15 days to 30 days on $3M of annual payables improves working capital by approximately $125K with no operational cost. For services businesses, accelerating the billing cycle by billing weekly rather than monthly or upon milestone completion rather than month-end also produces quick DSO improvement with minimal process change.
Work with Glacier Lake Partners
Optimize Working Capital Before Your Sale
We help founders run working capital improvement sprints before a process, DSO reduction, billing cadence, and payables management, and present the results in a format that supports a favorable WC peg negotiation.
Assess Your Readiness →Operating workflow scan
Find the reporting or execution workflow worth automating first.
Turn the issue in this article into a ranked AI workflow roadmap with readiness gaps and estimated time savings.
Find the first workflow →Research sources
Disclaimer: Financial figures and case-study details in this article are anonymized, composite, or representative examples based on middle market operating situations, and are not guarantees of outcome. Statistical references are drawn from cited third-party research; individual transaction and operational results vary based on business characteristics, market conditions, and deal structure. This content is for informational purposes only and does not constitute legal, financial, or investment advice. Consult qualified advisors for guidance specific to your situation.
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