The buyer's draft purchase agreement sets our Net Working Capital peg using an unadjusted twelve-month trailing average, which ignores our severe fourth-quarter inventory buildup and essentially cuts our cash at close by eight hundred thousand dollars. How do we calculate and defend a fair working capital peg?

Question

Tyler Smith · Accepted Answer

The Net Working Capital peg is one of the most common mechanisms buyers use to quietly reduce cash proceeds at the closing table. In a cash-free, debt-free deal, you are required to deliver a normal level of working capital so the business can operate uninterrupted on day one. If the buyer artificially inflates the target peg, you must leave extra cash in the company accounts or fund the difference out of your purchase price.

A simple twelve-month trailing average is deeply flawed if your business experiences seasonality, rapid expansion, or cyclical inventory purchasing. To defend against a hidden purchase price haircut, you must reconstruct the working capital calculation using adjusted monthly balance sheets.

First, eliminate all non-operating items, owner discretionary balances, income tax assets, and excess cash from current assets and liabilities. Standardize your accounts receivable and accounts payable aging to remove historical write-offs and abnormal billing cycles.

Second, if your business requires heavy inventory investments ahead of a fourth-quarter sales peak, demonstrate that this inventory buildup is seasonal rather than baseline operating capital. Propose a seasonal working capital mechanism that adjusts the peg based on the specific calendar month of closing, or establish an agreed working capital collar with an acceptable variance band of two to three percent.

Bring this analysis into your negotiations early during the LOI stage rather than waiting for definitive purchase agreement drafts. Document your working capital trends on your EOS Scorecard across trailing quarters. By presenting your own documented peg calculation backed by clear accounting logic, you prevent the buyer's diligence team from weaponizing working capital adjustments against your walkaway proceeds.