The buyer wants to establish our Net Working Capital target using a trailing twelve-month average, but our seasonal revenue peak occurs right at our scheduled closing date. How do we structure the working capital peg so we do not leave hundreds of thousands of dollars of our own cash on the closing table?

Question

Tyler Smith · Accepted Answer

Net Working Capital (NWC) targets set the baseline amount of current assets minus current liabilities required to operate the company smoothly post-close. When a buyer uses a simple trailing twelve-month (TTM) average for a seasonal business, they create an artificial distortion. If your closing occurs right at your seasonal peak, your actual receivables and inventory will be dramatically higher than the annual average, meaning you will inadvertently deliver massive amounts of surplus working capital to the buyer without receiving extra compensation.

To prevent this, reject an unadjusted twelve-month straight average. Counter with structural adjustments tailored to seasonal operational realities:

- Propose a seasonalized monthly target peg based on historical averages of that specific calendar month over the prior three years, rather than an annual mean.
- Alternatively, propose a rolling three-month average centered on the closing window, reflecting current inventory builds and operational commitments.
- Define cash and debt-like items rigorously. Ensure that seasonal customer deposits or prepayments are paired directly with the inventory they are financing, so the buyer cannot deduct the liability without recognizing the corresponding current asset.
- Establish clear true-up dispute mechanisms. Set a post-close review period (typically sixty to ninety days) where working capital adjustments are verified against actual collections rather than estimated book entries, with an independent CPA resolving deadlocks through standard IDS procedures.

Working capital adjustments represent one of the most common ways lower middle market sellers suffer unexpected price drops at the closing table. Lock in your peg definitions before signing the Letter of Intent.