Our business has very low inventory and capital requirements because we run on lean EOS principles, yet the buyer is proposing a high net working capital target. How do we structure the net working capital peg in the Letter of Intent to prevent them from taking our cash at close?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common ways buyers try to re-trade a deal at the last minute. If you agree to a standard working capital definition without specifying the formula in your Letter of Intent, you will likely leave significant cash on the table at close. Since you run a lean, systemized operation with low capital requirements, your historical working capital needs are naturally low. - Define the net working capital peg in the Letter of Intent using a clear, specific formula. - Exclude any non-operating assets and liabilities, such as owner-related accruals or cash-upfront customer deposits. - Base the peg on a rolling average that matches your actual operational cash cycle rather than a generic twelve-month window. Use your EOS operational data to defend your position. Show the buyer your scorecard metrics, highlighting your fast accounts receivable turnaround and automated billing workflows. This data proves that your lean working capital requirement is a permanent operational advantage, not a temporary fluctuation. By defining the exact working capital peg and accounting methodologies upfront, you prevent the buyer from inflating the target and forcing you to leave your cash in the business to fund their post-close operations.