The buyer is proposing a working capital peg based on a simple twelve-month average, but our business is highly seasonal, and this peg will force us to leave too much cash in the business. How do we calculate and negotiate a fair net working capital target?

Question

Tyler Smith · Accepted Answer

A simple twelve-month average for a working capital peg is a classic buyer trap designed to steal your cash at closing. If your business is seasonal, a flat average will either starve the business of operating cash or force you to write a massive check to the buyer to cover a temporary shortfall.

To protect your cash, you must calculate a rolling, volume-adjusted net working capital target that reflects your actual cash cycles. Analyze your accounts receivable, inventory, and accounts payable over a twenty-four-month period to identify seasonal peaks and valleys. Present this data to the buyer, proving that your working capital needs fluctuate predictably based on production cycles.

Recommend a seasonal peg or a cash-free, debt-free collar that adjusts the target based on the specific month you close the transaction. Ensure your leadership team is monitoring these working capital components as weekly Rocks on your Scorecard leading up to the transaction.

By managing your collections and payables tightly, you can optimize your working capital position before the transaction date. This ensures you do not leave a single dollar of excess cash on the table when the final balance sheet adjustments are calculated.