The Situation
A sponsor-backed strategic was looking at a bolt-on acquisition. The seller’s adjusted EBITDA looked clean. The deal structure was straightforward. The working capital peg, set off the trailing twelve months, looked routine.
What it actually was: a peg the seller had been quietly walking down for three quarters by accelerating AR collections and stretching AP days right before the diligence window. The buyer was on track to inherit a working capital gap that would show up immediately post-close.
What CEI did
Ran the trailing 24-month working capital analysis — not just the 12 months the seller had selected for the peg. Surfaced the inflection point where AR days had compressed and AP days had stretched in tandem.
Built the “normalized” working capital position based on a 24-month average, exposing the seasonality and the manipulation pattern.
Quantified the post-close cash hit: approximately $2.4M of working capital normalization the buyer would absorb in the first 60 days if the peg stayed as proposed.
Wrote the negotiation memo: recommended adjustment to the peg basis, a true-up mechanic tied to a longer historical average, and contractual language preventing late-window working capital engineering.
$2.4M
Post-Close Cash Hit Avoided
24-Month
Normalization Period Established
Renegotiated
Peg Mechanics
The sponsor took the analysis into the next negotiation round and reset the working capital peg on terms that protected the buyer post-close. The deal closed on revised mechanics — and the seller never argued the math, because the math was solid.
In Their Words
“A clean target looks clean until someone runs the right analysis. CEI ran the right analysis.”
— Operating Partner | Confidential Sponsor