Our business has grown fifty percent in the last six months, but the buyer wants to use a standard twelve-month rolling average to set our net working capital target. How do we negotiate a seasonal or short-term working capital peg so we do not leave our cash trapped in the business at closing?

Question

Tyler Smith · Accepted Answer

Using a standard twelve-month rolling average to set your net working capital, or NWC, target works well for slow-growth, flat businesses. But for a company experiencing rapid growth, this methodology is highly damaging. It creates an artificially high NWC peg, forcing you to leave excessive cash and accounts receivable in the business at closing to meet the target, which effectively lowers your net exit proceeds.

To protect your cash, you must demand a shorter, more representative look-back period. Advocate for a three-month rolling average or a seasonal peg that reflects your current, elevated operating reality. Back up this demand with your recent operational scorecard data. Show the buyer that your increased accounts receivable and inventory are actively supporting a permanently higher level of monthly revenue, not just a temporary spike.

If the buyer resists, propose a bifurcated working capital target. Set a baseline peg using the recent three-month average, but include a post-closing reconciliation mechanism. If the actual working capital needed to run the business over the first ninety days post-close is lower than the peg, the excess cash is returned to you dollar-for-dollar. This prevents the buyer from using outdated, historical metrics to trap your hard-earned cash inside the operating company.