Key takeaways
- The working capital peg in most M&A deals is set at the trailing 12-month average, which means operational WC discipline directly affects deal proceeds
- Most middle market businesses carry 15–25% more working capital than necessary due to slow collections and inventory management practices
- A 90-day working capital improvement sprint before a process begins can generate $500K–$2M of incremental closing proceeds on a $20–50M deal
- DSO reduction is the highest-leverage WC improvement for services businesses; inventory turns for product businesses
- Working capital discipline and working capital presentation are different, both matter in a transaction
Why working capital is a closing proceeds issue, not just an operations issue
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.
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.
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).
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.
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.
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.
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