The buyer is demanding a working capital target based on our peak seasonal inventory levels, which would force us to inject cash at close. How do we structure a Net Working Capital collar with upper and lower limits to prevent post-closing adjustment disputes?

Question

Tyler Smith · Accepted Answer

Buyers frequently use the Net Working Capital target, or peg, as a tool to claw back part of the purchase price. By demanding a target based on your peak seasonal inventory or receivables, they force you to leave an excessive amount of cash in the business at close. To prevent this, you must negotiate a Net Working Capital collar.

A collar establishes an upper and lower limit around a mutually agreed target, typically calculated as a twelve-month rolling average. If the actual working capital at closing falls within this band, no adjustment is made to the purchase price.

If it falls outside the collar, a dollar-for-dollar adjustment occurs, but only for the amount that exceeds the upper limit or falls below the lower limit. This structure prevents minor accounting variances or normal seasonal fluctuations from triggering a massive purchase price reduction.

To set a fair collar, analyze your historical cash conversion cycle and working capital trends over the past twenty-four months. Present this data to the buyer to demonstrate that your working capital naturally fluctuates within a defined range. By establishing a collar that reflects these real operational patterns, you protect your proceeds at close and eliminate the risk of post-closing disputes over working capital adjustments.