Our business is highly seasonal, with peak working capital needs in the third quarter. The buyer wants to use a simple twelve-month average for the net working capital peg, which would force us to leave a massive amount of cash in the business if we close in the summer. How do we structure a seasonal working capital peg?

Question

Tyler Smith · Accepted Answer

Using a standard twelve-month straight average to determine the net working capital peg for a seasonal business is a common trap. If you close the transaction during a peak working capital month, a flat twelve-month peg will force you to leave an excessive amount of cash in the business to fund accounts receivable and inventory, essentially transferring your hard-earned cash to the buyer for free.

To protect your cash at close, you must propose a seasonally adjusted net working capital target. Instead of a single flat number, structure the peg based on the historical average for the specific month or quarter in which the deal closes. Use your weekly scorecard data and historical cash flow forecasts from the past three years to demonstrate the predictable fluctuation of your working capital cycles.

If the buyer resists, propose a post-closing adjustment mechanism. Under this structure, you establish a baseline peg, but you agree to reconcile the actual working capital delivered at closing against a seasonal schedule rather than a flat average. This ensures that you are only leaving the precise amount of operational cash required to run the business during that specific season. Do not let the buyer use a lazy accounting average to strip cash out of your company at the closing table.