The buy-side Quality of Earnings team claims our monthly net working capital fluctuates too wildly to use a standard twelve-month rolling average for our peg. How do we defend our working capital baseline?

Question

Tyler Smith · Accepted Answer

Buyers look for high net working capital pegs because it forces you to leave more cash in the business at closing. If your business has seasonal patterns or uneven collection cycles, a basic twelve-month average might not reflect your true operational needs, allowing the buyer to claim a cash shortfall.

To defend your baseline, look to your weekly EOS® Scorecard history. Your scorecard tracks accounts receivable, accounts payable, and cash balances on a weekly basis, providing a granular view of your working capital cycles. Presenting this weekly data shows the buyer that your cash fluctuations are predictable and managed, rather than signs of operational instability.

Propose a seasonal adjustment mechanism instead of a flat average. For example, if your inventory requirements peak in the spring, the working capital peg should adjust dynamically based on the exact month of your closing date.

Additionally, identify any non-operational cash or prepaid expenses that are distorting your historical working capital. Ensure that prepaid items like annual software subscriptions are clearly identified so they are excluded from the operating working capital calculations. This data-driven approach removes the subjectivity from the negotiation and keeps your cash in your pocket.