The buyer wants to use a standard twelve-month average for our Net Working Capital peg, but our seasonal cash cycle means we are highly liquid in some months and dry in others. How do we structure the peg so we do not leave our own cash on the table at close?

Question

Tyler Smith · Accepted Answer

Accepting a simple twelve-month average for your Net Working Capital peg can be a costly mistake if your business has highly seasonal cash flows. If you close the transaction during a peak operational month, you might be forced to leave an excessive amount of cash in the business to meet a high peg, effectively discounting your net purchase price. To protect your capital, you must propose a peg that reflects your true seasonal operating cycle. Start by conducting a detailed, month-by-month working capital analysis over the last three years. Identify the periods of maximum and minimum working capital requirements. Under the framework of IVS 105, you want to use market-validated methodologies to demonstrate that a rolling average is inappropriate for your business model. Recommend a seasonal peg that adjusts based on the specific month of the close. Alternatively, you can negotiate a working capital true-up mechanism that allows for post-closing adjustments once the seasonal cycle plays out. Bring this challenge to your leadership team's Level 10 Meeting and use the IDS process to map out the financial impact of different closing dates. By showing the buyer that your working capital needs fluctuate predictably, you can negotiate a peg that keeps your excess cash in your pocket at closing.