Our business experiences heavy seasonality, causing our working capital to swing by millions throughout the year. How do we establish the working capital peg in the purchase agreement so we do not end up handing over excess cash to the buyer at closing?

Question

Tyler Smith · Accepted Answer

Net working capital adjustments are designed to ensure the buyer receives sufficient operating liquidity to run the business on day one without needing an immediate cash injection. The working capital peg is the agreed benchmark against which closing working capital is measured. If actual working capital at close exceeds the peg, the buyer pays you the difference; if it falls short, you refund the deficit from your transaction proceeds.

In a seasonal business, setting the peg based on a simple trailing-twelve-month average will distort your purchase price. If your closing occurs during a seasonal cash trough when receivables and inventory are naturally depressed, a twelve-month average peg forces you to write a massive check to the buyer to cover an artificial deficit. Conversely, closing at a seasonal peak could leave you shortchanged if the definition of current assets excludes seasonal spikes.

To avoid handing over free operating cash, you must base the peg on seasonal normalization rather than a flat mathematical average. Calculate trailing twelve-month averages by month or quarter to demonstrate clear historical cycles. Define the peg as the average working capital for the specific month or quarter in which closing occurs.

Furthermore, tighten the definition of working capital in the Letter of Intent. Explicitly exclude transaction expenses, debt-like items, and cash from the current asset calculation. Ensure your leadership team tracks billing cadences, accounts receivable aging, and inventory velocity on your weekly Scorecard so you can accurately forecast closing working capital and negotiate a defensible, seasonally adjusted peg.