Our business has highly seasonal revenue, and the closing date for our sale keeps sliding, which drastically changes our cash and accounts receivable balances. How do we structure a dynamic net working capital peg in the purchase agreement so we do not end up handing over millions in free cash to the buyer at close?

Question

Tyler Smith · Accepted Answer

Setting a static net working capital peg for a seasonal business is a recipe for disaster. If your closing date shifts from a high-cash month to a low-cash month, a fixed peg can force you to leave an unreasonable amount of working capital in the business, effectively lowering your net proceeds. To prevent this, you must negotiate a dynamic net working capital peg that adjusts based on the actual closing date. Instead of a single average number, calculate a trailing twelve-month average for each potential closing month. If the deal closes in October, the peg should reflect October's historical requirements, not an annual average that distorts the true operational needs of that specific month. Use your weekly Scorecard history to prove your cash conversion cycle to the buyer. Show them exactly how quickly accounts receivable turn into cash and how inventory levels fluctuate throughout the year. By presenting this data clearly, you can defend against the buyer's attempts to use a flat peg that favors their cash position. Additionally, structure a post-closing true-up window of no more than sixty days. This limits the time the buyer has to manipulate your working capital calculations post-close. Having your leadership team track working capital metrics on their weekly Scorecard during the closing process ensures you spot any deviations early and protect your cash at close.