The buyer's draft of the definitive agreement includes a net working capital adjustment mechanism with a clawback but no upward adjustment if we deliver excess working capital at close. How do we restructure this two-way peg to ensure we are compensated for every dollar of value we leave on the table?

Question

Tyler Smith · Accepted Answer

A one-way net working capital adjustment is a red flag. It means if you deliver less working capital than the peg, the purchase price is reduced, but if you leave excess working capital in the business, the buyer keeps it for free. You must insist on a symmetrical, two-way adjustment mechanism. To win this point, argue that a two-way peg is the industry standard for fair dealing. Explain that working capital fluctuates based on timing, and a symmetrical adjustment ensures neither party gets a windfall or a penalty based on the exact day the transaction closes. Define the net working capital target using a mutually agreed-upon methodology, such as a twelve-month rolling average that excludes non-operating assets and liabilities. Then, draft the adjustment clause to state that if the actual net working capital at close exceeds the target, the purchase price increases dollar-for-dollar, paid to you as cash at close. Manage this negotiation through your structured leadership processes. Keep your eye on your weekly scorecard to monitor accounts receivable and accounts payable trends. By maintaining tight operational control over your cash conversion cycle, you can accurately project your closing working capital and protect your cash.