We are drafting our Letter of Intent, and the buyer wants to use standard language stating that the Net Working Capital peg will be mutually agreed upon during due diligence. Why is this a trap, and how do we structure the formula now?

Question

Tyler Smith · Accepted Answer

Agreeing to defer the Net Working Capital peg calculation until due diligence is a massive mistake that gives the buyer an easy opportunity to re-trade the deal. If you leave the peg undefined in the Letter of Intent, the buyer will wait until you are deep in exclusivity, when your leverage is gone, and then propose a high peg that forces you to leave a substantial amount of your own cash in the business at close.

You must eliminate this ambiguity by defining the exact mathematical formula for the Net Working Capital peg directly in the LOI. Specify that the peg will be calculated as the average of your monthly net working capital over the trailing twelve months, using consistent accounting methodologies. Explicitly list which accounts are included and excluded, ensuring that cash, debt, and non-operating assets are left out.

If your business has recently transitioned to an automated or subscription-based model that reduced your inventory or receivables, state that the peg will be based on a shorter, more representative three-month or six-month average.

By locking down the formula in the LOI, you prevent the buyer from turning a standard accounting adjustment into a retroactive price discount, ensuring you walk away with the cash you earned.