The buyer is trying to adjust the net working capital target in the final draft of the purchase agreement to force us to leave more cash in the operating account at close. How do we construct a clear working capital peg that protects our transaction proceeds?

Question

Tyler Smith · Accepted Answer

The net working capital target, or the peg, is one of the most common areas where buyers try to claw back value in the final days of a transaction. If the target is set too high, you are forced to leave excess cash in the business, which effectively reduces your net proceeds at closing.

To protect your cash, you must base the working capital target on a clear, trailing twelve-month average of your historical balance sheets, rather than a single point in time or a seasonal peak.

Analyze your cash conversion cycle to show how inventory, accounts receivable, and accounts payable fluctuate over a full fiscal year. This analysis should demonstrate that your cash needs vary predictably and that the average represents your true operational requirements.

Use your weekly scorecard to track the aging of your accounts receivable and payable leading up to the transaction. This data will prove that your working capital levels are managed efficiently and are not artificially inflated.

You should also negotiate a net working capital collar, which establishes a reasonable range around the target. This collar ensures that minor fluctuations in cash or receivables at close do not trigger automatic purchase price adjustments. By relying on historical data and establishing a clear collar, you prevent the buyer from using working capital as a backdoor price discount.