During final deal structuring, how do we negotiate the specific collar around our target working capital peg so normal month-to-month inventory fluctuations do not trigger a post-close purchase price reduction?

Question

Tyler Smith · Accepted Answer

Net working capital adjustments are one of the most common ways buyers quietly claw back purchase price after the closing dinner. Standard purchase agreements adjust the purchase price dollar-for-dollar based on the difference between the target working capital peg and actual working capital at close. If your business experiences seasonal spikes or inventory swings, a rigid peg can cost you hundreds of thousands of dollars. You solve this by negotiating a working capital collar.

A working capital collar creates a negotiated buffer zone around the peg, typically set at one to two percent of enterprise value, or a specific dollar band above and below the target. Under this structure, no purchase price adjustment occurs in either direction as long as closing working capital falls within the agreed collar. If working capital falls outside the band, adjustments only apply to the amount exceeding the boundary.

To negotiate this successfully, ground the conversation in trailing historical data. Present a twelve-month rolling calculation of your working capital, using your weekly Level 10 Meeting Scorecards to show inventory turns, receivables aging, and payables cycles. Demonstrate that month-to-month swings in raw materials or work-in-progress are standard operating variations necessary to fulfill confirmed orders, not an extraction of cash from the company.

Ensure the definitive legal agreement defines current assets and liabilities with absolute precision, excluding obsolete inventory formulas, tax accruals, and transaction-related expenses. By inserting a symmetric collar and standardizing your accounting definitions, you protect your proceeds against normal operational volatility and prevent the buyer from turning routine supply chain timing into an unfair post-close discount.