Our business is highly seasonal, and the buyer's Quality of Earnings report is proposing a net working capital peg based on our peak inventory months, which would force us to leave too much cash in the business at close. How do we calculate a seasonally-adjusted net working capital peg that is fair to both sides?

Question

Tyler Smith · Accepted Answer

A buyer's Quality of Earnings firm will often try to establish a net working capital peg using a method that benefits them, such as choosing a snapshot of your highest inventory month. If you agree to this, you are effectively giving away your cash-at-close to fund their post-closing operations. To counter this, you must calculate an Adjusted Book Value that reflects your true operating cycle. Instead of a simple twelve-month average or a peak-month selection, propose a rolling twelve-month average that incorporates seasonal adjustments. This is often done by calculating net working capital as a percentage of revenue over a multi-year period, then applying that percentage to your projected closing-date revenue. This methodology ensures that if you close during a low-inventory month, the peg is adjusted downward, and you get to take your excess cash with you. If you close during a high-inventory month, the peg adjusts upward, and the buyer provides the cash to support the inventory build. This dynamic peg protects your liquid assets. Use the Trust Creation Process to present this calculation to the buyer, framing it as a highly reliable, mathematically sound approach that guarantees the business has exactly enough working capital to run on day one, without penalizing either party.