We are drafting the definitive purchase agreement after signing the LOI, and the buyer wants to set a net working capital peg based on a simple twelve-month average, but our business experiences intense seasonal fluctuations. How do we negotiate a seasonal working capital peg that does not starve our operations or leave our cash locked in the business?

Question

Tyler Smith · Accepted Answer

Setting a net working capital peg based on a straight twelve-month average can destroy your post-close liquidity if your business is seasonal. If you close during your peak season, you will have high accounts receivable and high inventory. If the peg is set at a lower annual average, you will be forced to leave a massive amount of excess cash in the business at close to meet that target, effectively giving the buyer your own working capital for free.

To avoid this, you must negotiate a seasonal working capital peg. Instead of a single annual average, construct a target that adjusts based on the closing month, using a trailing three-month or six-month average.

Bring data to the negotiation table. Use your EOS® weekly Scorecard history from the past three years to plot your exact peak-to-trough operational cash cycles. Show the buyer that your working capital needs fluctuate predictably throughout the year.

By proving this seasonality with clean, historical operational metrics, you can justify a dynamic working capital peg. This ensures that if you close during a high-activity month, the peg increases, but you are credited for the excess working capital. Conversely, if you close during a low-activity month, the peg drops.

This approach preserves your cash-free, debt-free purchase price. It ensures you do not leave hard-earned operational cash on the table because of a lazy, unadjusted accounting formula.