Our business experiences highly seasonal cash flow swings, and the buyer wants to set the net working capital peg based on a simple trailing twelve-month average. How do we structure a seasonal working capital mechanism or a rolling peg to ensure we do not leave excess cash in the business at close?

Question

Tyler Smith · Accepted Answer

A standard twelve-month average for your net working capital peg will penalize you if you close during a high-cash, high-receivable season. If your working capital is artificially high at close compared to the annual average, you will be forced to leave extra cash in the business to meet the peg, essentially giving the buyer free money.

To prevent this, you must negotiate a seasonal working capital mechanism.
- Propose a rolling peg that adjusts based on the specific month or quarter of the closing date.
- Use historical monthly working capital data from the last three years to establish a seasonal baseline for each calendar month.
- Structure the final adjustment so that any working capital surplus above the seasonal baseline is paid out to you dollar-for-dollar post-close.

By demonstrating how your cash flow cycles operate using historical data, you can prove that a static annual average is a flawed metric. This ensures that the cash you worked hard to generate remains yours, and the buyer only gets the normal operational buffer they actually need to run the business. Bring this issue to your leadership team to model out different closing dates on your cash flow projections.