The buyer wants to set our net working capital peg based on a simple twelve-month historical average, but our project-based billing creates massive seasonal cash swings. How do we calculate a fair peg that does not force us to leave excess cash behind?

Question

Tyler Smith · Accepted Answer

Accepting a standard twelve-month average for your net working capital peg during a seasonal peak can cost you hundreds of thousands of dollars at closing. If you agree to a peg that is artificially high, you will be forced to leave extra cash in the business to meet that target, effectively reducing your net proceeds.

- To defend your balance sheet, you must analyze your working capital on a monthly, rolling basis and present a seasonal adjustments model. Look at your historical working capital cycles over the last three to five years to identify the exact months where receivables and payables peak and trough.

- Use your weekly Scorecard data to show the buyer how your cash conversion cycle operates in real-time. Prove that your working capital needs fluctuate predictably based on project milestones and billing cycles.

- Negotiate for a seasonal net working capital peg that adjusts based on the exact month of the close, rather than a flat annual average. Alternatively, propose a working capital corridor, which establishes an acceptable range rather than a single fixed number. This ensures you do not get penalized for closing during a high-receivables month, allowing you to extract every dollar of cash you have earned.