We agreed on a six times EBITDA multiple in the LOI, but now the buyer is insisting on a working capital peg that feels artificially high, which effectively lowers our net cash proceeds. How do we negotiate a fair working capital target to protect our valuation at closing?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common places where buyers try to claw back the purchase price at the last minute. If they set the peg too high, you have to leave more cash in the business at closing, which directly reduces your net cash. You must defend your working capital calculation by using a trailing twelve-month average that reflects your actual operating cycle rather than letting them pick a single peak month.

To prepare for this, look at your weekly scorecard. Your operational metrics should show a predictable cash conversion cycle, including accounts receivable days outstanding and inventory turns. If your cash cycle is tight and efficient, you can prove that the business requires less working capital to run on a day-to-day basis.

We recommend presenting a normalized working capital analysis early in the due diligence process. Calculate the average net working capital over the last twelve months, excluding any extraordinary or non-recurring items. If your business has seasonal fluctuations, show how those cycles impact your needs. By establishing a clear, data-driven historical baseline before the final purchase agreement is drafted, you prevent the buyer from using an arbitrary peg to adjust your valuation downward.