Our cash flow and inventory levels fluctuate wildly depending on the season. The buyer wants to use a simple twelve-month average to set our net working capital peg, which will hurt us if we close during our peak season. How do we negotiate a fair peg?

Question

Tyler Smith · Accepted Answer

A standard twelve-month average net working capital peg works well for linear businesses, but it is highly damaging for seasonal operations. If you close the transaction at a time when your inventory and accounts receivable are naturally at their highest point, a flat peg will force you to leave a massive amount of working capital in the business at closing for zero extra compensation. This essentially reduces your net cash proceeds.

To protect your cash, you must negotiate a working capital peg that accounts for your seasonal cycle. Instead of a single flat target, propose a seasonal peg that adjusts depending on the specific month of closing. Alternatively, you can use a rolling three-month average or build a working capital true-up mechanism that adjusts the final purchase price dollar-for-dollar based on your historical working capital levels for that exact calendar month over the last three years.

Your finance leader should prepare a detailed month-by-month cash and working capital analysis to present to the buyer's Quality of Earnings team. Use this data to prove that your working capital build-up is temporary and funded by your own cash flow, which you expect to be repaid for at closing. By standing firm on a seasonal adjustment, you ensure you do not leave your hard-earned cash trapped in the business.