The prospective buyer submitted an LOI stating that working capital will be adjusted at closing based on a normal target, but left the actual dollar target and calculation method undefined. How do we lock down working capital mechanics in the LOI before granting exclusivity?

Question

Tyler Smith · Accepted Answer

Leaving net working capital undefined in the LOI is an invitation for the buyer to seize your cash at close. Buyers frequently manipulate the working capital peg during late-stage definitive drafting by cherry-picking reference months or reclassifying normal liabilities, effectively reducing your headline purchase price dollar-for-dollar.

Do not sign an LOI with vague language like mutually agreeable target or normal working capital. Require the LOI to define the exact formula, including which balance sheet accounts are inside or outside current assets and current liabilities. Explicitly state that cash, cash equivalents, shareholder loans, transaction bonuses, and funded indebtedness are excluded from the working capital calculation.

Establish the methodology for the peg directly in the LOI. Insist on a trailing twelve-month average to smooth out seasonal fluctuations, inventory cycles, and quarterly invoicing spikes. If your business is scaling rapidly, adjust the historical average upwards proportionally so you are not penalized for supporting recent growth.

Furthermore, demand that the LOI include a mutually agreed dollar collar around the target. A collar specifies that no purchase price adjustment occurs unless working capital deviates by more than fifty thousand or one hundred thousand dollars from the agreed target. Locking down these structural terms before signing exclusivity removes the buyer's primary leverage point for retrading.