The buyer agreed to our valuation multiple on a cash-free, debt-free basis, but they are trying to set the target working capital peg using our peak inventory months. How do we defend our working capital calculation so we do not suffer a purchase price reduction at closing?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common mechanisms buyers use to execute a backdoor price cut. In a cash-free, debt-free transaction, you are obligated to deliver a normal level of working capital at closing to allow the buyer to operate the business uninterrupted. If the final working capital delivered is below the agreed peg, the purchase price is reduced dollar for dollar.

When a buyer cherry-picks peak seasonal inventory months to set the target, they artificially inflate the peg. If your actual working capital at closing returns to a normalized level, you are forced to leave substantial excess cash in the company or face an automatic closing adjustment.

To counter this tactic, insist that the working capital peg be established using a trailing twelve-month average. A full twelve-month cycle balances out seasonal inventory buildups, customer billing surges, and standard timing differences in accounts payable.

Next, ensure the working capital definition strictly excludes non-operating items, such as transaction bonuses, deferred tax assets and liabilities, and owner-related accruals that will be settled at closing. If your business is growing rapidly, incorporate an operating cash buffer adjustment so the peg reflects true operational necessity rather than a static balance sheet capture.

Review your working capital metrics every week on your Level 10 Meeting Scorecard. Entering diligence with clean, historical monthly working capital schedules prevents the buyer from dictating an artificial target.