Our business has strong seasonal swings in inventory and receivables, and the buyer wants to use a trailing twelve-month average to calculate the net working capital peg. How does this distort our closing cash, and how do we counter it?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free transaction, net working capital (NWC) is not an academic calculation. It directly increases or decreases the actual cash wired to your bank account at closing. If your business experiences strong seasonal fluctuations, accepting a simple trailing twelve-month average NWC peg can hand hundreds of thousands of dollars of your own cash to the buyer.

Working capital peaks when you build inventory and receivables ahead of high-volume delivery months, and troughs when those receivables convert to cash. If you close your transaction during your peak operating season, your actual working capital will sit far above a twelve-month historical average. Under standard purchase agreements, the excess working capital remains in the business to support operations, and you only receive an adjustment if the peg properly accounts for that seasonal swell.

Conversely, if you close during a seasonal trough, your actual working capital will fall below the twelve-month average, forcing an immediate purchase price reduction at closing.

To counter this distortion, do not accept a straight twelve-month average. Instead, propose a seasonalized working capital peg based on historical performance during the exact calendar month of close. Show monthly historical ratios of working capital as a percentage of revenue over the past three years to prove what is operationally required to run the company during that specific operating window.

Establishing a seasonal collar around the peg protects your operating liquidity and ensures that normal seasonal cash generation is not reclassified into free working capital for the buyer.