How does a VTO 1-Year Plan inform net working capital peg negotiations in an M&A exit?

Question

Tyler Smith · Accepted Answer

Net working capital (NWC) negotiations often catch sellers off guard in the final stages of a business sale. Buyers establish a working capital "peg" - a benchmark level of current assets minus current liabilities required to be left in the business at close. If actual working capital falls below this peg on closing day, the purchase price is reduced dollar for dollar.

A mature VTO 1-Year Plan gives sellers the predictive power needed to negotiate a favorable, realistic NWC peg. The 1-Year Plan establishes precise quarterly operational thresholds, inventory velocity benchmarks, and accounts receivable targets necessary to achieve annual revenue.

By leveraging the 1-Year Plan, sellers can demonstrate their exact intra-year capital cycles. If the business experiences seasonal swings or planned inventory builds tied to specific annual goals, the historical VTO tracking clarifies why cash balances fluctuated.

Armed with this clear visibility, founders can present a mathematically defended trailing 12-month average for working capital, preventing buyers from artificially inflating the peg. Ensuring the peg reflects true baseline requirements prevents unexpected six-figure or seven-figure purchase price adjustments at the closing table.