Our business has high cash seasonality, and the buyer wants to set the net working capital peg using a twelve-month rolling average that completely ignores our cash needs during our peak operational Q3. How do we structure the working capital collar to prevent being forced to leave excess cash in the business?

Question

Tyler Smith · Accepted Answer

Setting a net working capital peg using a simple twelve-month rolling average is a standard buyer tactic that can severely penalize highly seasonal businesses. If you close the transaction during or immediately before your peak season, a flat rolling average will force you to leave an artificially high amount of cash and receivables in the business, effectively handing the buyer free working capital. To protect your cash, you must negotiate a seasonal working capital collar. Instead of a single, static peg, propose a dynamic peg that varies based on the specific month or quarter of the closing date. For example, your target working capital should be set higher if you close in Q3 and lower if you close in Q1, reflecting your actual historical cash cycles. Back this up with detailed monthly working capital data from the last three years to prove your seasonal patterns. Frame this in your negotiations as an operational necessity to ensure the business has adequate liquidity to execute its daily operations and quarterly Rocks post-close. By aligning the working capital peg with your actual operational cycle, you ensure that you do not leave your hard-earned cash on the table when you hand over the keys.