The buy-side due diligence team is calculating our Net Working Capital peg using a simple twelve-month average, but our cash cycles have massive seasonal swings. How do we adjust the working capital target so we do not leave our cash in the business at close?

Question

Tyler Smith · Accepted Answer

Using a standard twelve-month rolling average to calculate the Net Working Capital target is a classic buyer tactic to capture excess cash, especially in businesses with seasonal cycles. If you close the transaction during a peak inventory or accounts receivable season, a flat average peg will force you to leave an unfair amount of working capital in the business, effectively lowering your net proceeds.

To defend your cash, you must present a detailed, transaction-level analysis of your monthly cash cycles over the last three to five years. Group this data into seasonal cohorts to show the predictable peaks and troughs of your working capital needs. You should argue that the NWC peg must be based on a seasonal adjustment mechanism rather than a static twelve-month average.

Define the working capital peg based on the specific month of the year you close the transaction. If you close during a high-receivable month, the peg should adjust upward, but you must also ensure you are fully compensated dollar-for-dollar for any working capital delivered above that adjusted target. By matching the working capital target to your actual operational rhythm, you prevent the buyer from using due diligence accounting tricks to strip liquidity from your business at the closing table.