Our business experiences high seasonal cash flow swings, and the buyer is proposing a net working capital target based on our peak operating cycle. How do we defend a seasonal cash peg to avoid leaving excess cash in the business at close?

Question

Tyler Smith · Accepted Answer

Setting the Net Working Capital target is one of the most contentious parts of closing a transaction. If a buyer proposes a flat average target or uses a peak operating month as the peg, they are attempting to force you to leave a disproportionate amount of cash in the business at close, which effectively reduces your net proceeds.

To defend your cash position, you must present a detailed, rolling twelve-month cash and working capital analysis. This analysis should isolate the seasonal swings in inventory, accounts receivable, and accounts payable. Under the IVS 105 guidelines, a proper valuation must reflect the normal operational cycle of the business. Prove to the buyer that during your peak months, your working capital is artificially inflated by temporary inventory builds and receivables that naturally liquidate into cash during the off-season.

Propose a dynamic Net Working Capital peg rather than a static one. A dynamic peg adjusts based on the actual month of closing, using historical monthly averages rather than a simple annual average. If you close in a low-capital month, the peg is lower; if you close in a high-capital month, the peg is higher. This prevents the buyer from benefiting from a temporary working capital surplus.

Back this up with your operational data. Show how your inventory turns and collection cycles are tightly managed through weekly scorecard tracking. By proving your working capital levels are optimized and predictable rather than bloated, you can force the buyer to accept a fair, seasonally adjusted peg that protects your cash at close.