The Letter of Intent includes a generic net working capital target based on a trailing twelve-month average, but our cash flow peaks dramatically in the third quarter. How do we structure the working capital peg in the definitive agreement to avoid over-funding the buyer's post-closing operations?

Question

Tyler Smith · Accepted Answer

A simple twelve-month average for net working capital is highly damaging for seasonal businesses. If you close your transaction during a peak cash-requirement month, using a flat twelve-month average means you will be forced to leave a disproportionate amount of cash in the business to meet the peg. You are essentially giving the buyer free working capital to run their post-closing operations.

To prevent this, you must negotiate a seasonal or monthly working capital peg rather than a static annual average. Analyze your historical balance sheet data to map your exact working capital needs for each month of the year.

Use this data to propose a rolling target that adjusts based on the specific month you close. For example, if you close in Q3 when your inventory and receivables are at their highest, the working capital peg must be adjusted upward, but with a clear agreement that you will be compensated dollar-for-dollar for the excess net working capital left in the business.

Do not let the buyer's financial team simplify this calculation for their own convenience. Use your weekly EOS scorecard trends to prove how cash, inventory, and receivables fluctuate predictably throughout the year. By presenting a detailed, data-driven seasonal analysis, you force the buyer to accept a dynamic peg that accurately reflects your operational reality, preserving your cash at close.