During our initial deal structuring discussions, the buyer is proposing a working capital peg based on a simple twelve-month historical average, but our recent operational shift to pre-billed quarterly contracts has significantly increased our cash on hand. How do we negotiate a seasonal or adjusted working capital peg so we do not leave our hard-earned cash on the table at close?

Question

Tyler Smith · Accepted Answer

The working capital peg is a critical deal term that can quietly drain millions of dollars from your cash at close if structured incorrectly. Buyers typically try to use a twelve-month historical average to set the peg, which assumes your cash needs are static. However, if your business is growing rapidly or if you have transitioned to an upfront billing model, a historical average will force you to leave too much cash in the business to satisfy the working capital requirement.

To prevent this, you must negotiate a peg that reflects your current operational run rate. If your cash flow has improved due to pre-billed quarterly contracts, argue for a shorter look-back period, such as the last three to six months, to establish a more accurate working capital requirement.

Use your weekly Scorecard data to demonstrate your actual cash conversion cycle and working capital needs. Prove to the buyer that your business requires less operating cash to run than it did a year ago because of your operational efficiency.

You can also propose a seasonal peg or a collar that allows the working capital target to fluctuate within an agreed-upon range. This ensures that you only leave the exact amount of cash needed to sustain normal operations post-close, allowing you to extract any excess cash as part of your purchase proceeds.