We are in the final stages of negotiating the net working capital target after signing the LOI, and the buyer wants to use a simple twelve month average. However, our seasonal operational cash needs spike right around our projected closing date. How do we use our financial data to negotiate a seasonal NWC peg that does not force us to leave excess cash in the business?

Question

Tyler Smith · Accepted Answer

A standard twelve month straight average for net working capital is a trap if your business experiences seasonality. If you close during a peak inventory or accounts receivable cycle, a flat average will force you to leave a disproportionate amount of your cash in the business to meet a high peg, effectively lowering your net walk away proceeds. To defeat the twelve month average argument, you must present a detailed monthly working capital analysis that aligns with your operational cadence. Pull the weekly cash flow metrics from your EOS Scorecard over the last three years to show the clear, predictable peaks and valleys of your operating cycle. Identify the specific drivers of your seasonal working capital spikes. If you must pre build inventory or carry higher receivables during specific quarters, prove that these assets convert rapidly back to cash within a defined sixty day window. Use your Step by Step Exit Business Integrity Review to demonstrate that your collections process is highly optimized and that these seasonal spikes are not indicators of bad debt or slow moving inventory. Negotiate for a seasonal net working capital peg rather than a static annual average. This means the target working capital peg adjusts based on the specific month in which the transaction closes. By tying the peg directly to your historical monthly averages, you ensure that you only leave the exact amount of operational runway required to run the business, allowing you to extract all excess cash at close.