The buyer is calculating our Net Working Capital target using a straight twelve-month trailing average, but our business experiences heavy fourth-quarter seasonality that artificially inflates the peg and will force us to leave excessive cash on the table at close. How do we negotiate a seasonal or normalized working capital mechanism to protect our cash at close?

Question

Tyler Smith · Accepted Answer

Working capital disputes are the single most common mechanism buyers use to claw back purchase price after the Letter of Intent is signed. If a buyer applies a simple twelve-month trailing average to set your Net Working Capital target, any business with fourth-quarter seasonality gets penalized. Closing in the first half of the year will force you to fund a target calculated against peak inventory and receivable levels, leaving your cash trapped on their balance sheet.

To neutralize this trap, reject the flat twelve-month average during initial purchase agreement negotiations. Instead, build your working capital model around monthly percentage-of-revenue ratios or a seasonally adjusted trailing twelve-month average that reflects the exact month of close.

Run your historical numbers inside your leadership team using your weekly Scorecard data to track trailing 24-month cycles. Show the buyer that working capital swings are predictable seasonal requirements, not permanent structural capital. Propose a peg based on the average of the same calendar month over the prior three years, rather than an arbitrary blended year.

Additionally, establish a mutual working capital collar. A standard collar creates a neutral band, typically one to two percent of enterprise value, around the peg where no post-close cash true-up occurs. This prevents tedious post-close accounting fights over minor receivable variances.

Define every component of current assets and current liabilities specifically in an exhibit to the purchase agreement. Explicitly exclude aged payables, transaction bonuses, and deferred revenue from the calculation if they distort operating capital. Controlling the methodology protects every dollar of cash you earned prior to close.