We just signed an LOI with a financial sponsor, but the working capital peg calculation they proposed uses a twelve-month rolling average that includes our lowest-revenue season. How do we renegotiate this working capital definition during diligence without blowing up the deal?

Question

Tyler Smith · Accepted Answer

Working capital peg negotiations are where many solid deals fall apart because buyers try to set a target that forces you to leave extra cash in the business. When a buyer insists on a twelve-month rolling average that captures your lowest-revenue season, they are trying to lock in an artificially high net working capital target. This forces you to fund their post-close operations with your cash.

To counter this strategy, you must present a highly detailed, daily or weekly cash flow history that aligns with your operational metrics. This is where your weekly Scorecard becomes your ultimate defense. Pull the last two years of actual collections and payables data to prove that your cash needs fluctuate predictably based on operational cycles, not a flat annual average.

Propose a seasonal net working capital peg instead of a static trailing twelve-month average. Argue for a target that changes quarterly based on projected revenue, backed by your V/TO® forward-looking projections. By matching the working capital target to your actual seasonal operational needs, you protect your cash at close.

Use your weekly Level 10 Meeting™ to assign a specific Rock to your financial leadership to assemble this cash proof. Show the buyer that your working capital needs are systematically managed and highly predictable, leaving no room for them to demand arbitrary cash cushions.