Our business experiences significant seasonal fluctuations in cash flow, but the buyer's investment banker is insisting on a trailing twelve-month average to set our net working capital target. How do we structure a seasonal working capital peg to prevent them from taking a massive working capital adjustment out of our cash at close?

Question

Tyler Smith · Accepted Answer

Setting a net working capital target based on a simple twelve-month average is highly damaging for a seasonal business. If you close the transaction during your peak operating season, your accounts receivable and inventory will be temporarily inflated, meaning you will be forced to leave a massive amount of working capital in the business without compensation. Conversely, closing in a low season can create a shortfall that you must fund out of your purchase price.

To prevent this, you must structure a seasonal working capital peg. Instead of a single flat target, propose a monthly or quarterly target that reflects your actual historical cash cycles. This ensures that the working capital requirement adjusts dynamically based on the exact month of your closing.

To build a defensible model for this seasonal peg, rely on the data from your EOS Scorecard. Show the buyer your historical weekly cash flow, receivables, and payables cycles over the past three years. This level of granularity proves that your working capital needs are predictable and highly managed, rather than random.

It also demonstrates that your leadership team has tight control over cash collections. By using the Business Integrity Review framework from Step by Step Exit, you can present this seasonal data in a visually compelling way that buy-side auditors cannot easily dismiss. Proactive structuring of the working capital peg prevents the buyer from using seasonal cash fluctuations to negotiate a post-close price reduction.