Our business experiences significant seasonal fluctuations in working capital, and the buyer's proposed fixed working capital peg will penalize us if we close during our peak cash-generation season. How do we structure a rolling-average working capital target that accounts for this seasonality?

Question

Tyler Smith · Accepted Answer

A fixed working capital peg is a trap for seasonal businesses. If the buyer sets a static target based on an annual average, and you close the deal when your accounts receivable are at their highest, you will be forced to leave a massive amount of cash in the business to meet that peg. This essentially lowers your net cash proceeds at close.

To protect your cash, you must negotiate a working capital peg that adjusts based on the seasonality of your operations. Instead of a single fixed number, propose a dynamic peg calculated on a rolling twelve-month average, or a specific monthly peg that aligns with the historical average of the exact month you close.

Provide the buyer with a detailed monthly breakdown of your historical working capital requirements. Use your EOS financial tracking tools to show the predictable cyclical patterns of your cash, inventory, and receivables throughout the year.

By proving that these fluctuations are normal and predictable, you can secure a dynamic working capital mechanism in the purchase agreement. This ensures that you get paid fairly for the working capital you have built up during your peak season, rather than giving it away to the buyer for free.