We signed an LOI with a generic cash-free, debt-free clause, but now the buyer is proposing a Net Working Capital peg based on our peak seasonal receivables rather than a true twelve-month average. How do we negotiate the working capital target between LOI and the definitive purchase agreement without blowing up the deal?

Question

Tyler Smith · Accepted Answer

The Net Working Capital peg is one of the most common mechanisms buyers use to silently re-trade a deal between the letter of intent and final closing. In a standard cash-free, debt-free transaction, you keep your cash and pay off your interest-bearing debt, but you must leave behind enough operational liquidity for the buyer to run the business on day one. By setting the peg at your peak seasonal accounts receivable, the buyer is trying to force you to leave excess operating cash in the company or suffer a purchase price deduction.

Never accept a single-point-in-time calculation or a cherry-picked seasonal high for the peg. Counter immediately with a comprehensive trailing twelve-month historical average of current assets excluding cash, minus current liabilities excluding debt.

Walk the buyer through your cash conversion cycle using concrete historical data. Demonstrate your inventory turns, billing cadence, and debtor days sales outstanding across peak and trough months. Show them that setting the peg at the peak level artificially inflates the capital required to operate the company, effectively forcing you to fund their balance sheet with your retained equity.

If your business is growing rapidly, a simple trailing average might understate current needs, but a peak number completely overstates normalized requirements. Propose an equitable compromise: calculate the average net working capital as a consistent percentage of trailing revenue over the last twelve months, and apply that ratio to projected revenue at close. Lock down the exact mathematical formula, dispute resolution mechanics, and excluded accounts inside the definitive purchase agreement before beginning final documentation.