We are in the high-stakes period between signing the LOI and closing, and the buyer is trying to set an artificially high Net Working Capital peg by using a trailing twelve-month average that includes our peak inventory build season. How do we negotiate a fair working capital target without leaving cash on the table?

Question

Tyler Smith · Accepted Answer

The Net Working Capital peg is one of the most common places where sellers lose money at the closing table. Buyers use a trailing twelve-month average because it sounds fair, but if your business has seasonal inventory spikes or rapid growth, a simple average will force you to leave excess cash in the business to fund their post-close operations. To fight this, your leadership team needs to dissect your balance sheet. Analyze your historical working capital cycles alongside your operational cash flow. Propose a seasonal weighting or a shorter, more representative period, such as the last six months, to reflect your current operational efficiency. Map this out using your Accountability Chart to ensure your finance lead has the dedicated focus to build a daily cash and working capital model. Present a clean, normalized working capital analysis that excludes non-operating assets and liabilities. Show the buyer how your inventory levels align with your actual sales pipeline and production capacity. If they insist on the high peg, demand a dollar-for-dollar increase in the purchase price or structure a post-close adjustment mechanism that returns excess working capital to you once the peak season passes.