During the buy-side Quality of Earnings audit, the buyer is analyzing our historical working capital to set a net working capital peg, but our business experiences highly seasonal cash cycles. How do we present our twelve-month rolling working capital average to ensure we do not end up leaving too much cash in the business at close?

Question

Tyler Smith · Accepted Answer

Seasonal cash flow swings can destroy your valuation if the buy-side analysts calculate your net working capital peg using a single low-point snapshot. Buyers want to set the working capital peg as high as possible so you have to leave more cash in the operating accounts at close. To defend your proceeds, you must present a rolling twelve-month average of your working capital that clearly accounts for your seasonal peaks and valleys. During the Quality of Earnings audit, use your historical financial data to prove that your cash cycles are predictable and tied directly to operational rhythms. In your EOS system, your weekly scorecard tracks cash and receivables with high precision. Use this data to show the auditors that your cash buildup is a temporary operational requirement, not a permanent surplus that belongs to the buyer. Propose a working capital adjustment mechanism in the purchase agreement that uses a true-up period of ninety days post-closing. This allows both parties to reconcile the actual working capital delivered against the historical average. By preparing this analysis before the buyer begins their due diligence, you control the narrative and prevent the buy-side team from setting an artificial peg that drains your cash-at-close.