Our business experiences pronounced seasonal peaks in Q2 and Q4, and the buyer wants to set a fixed net working capital peg using an unadjusted six-month average that falls right after our lowest cash cycle. How do we structure a seasonal peg to avoid funding their balance sheet post-close?

Question

Tyler Smith · Accepted Answer

Agreeing to a net working capital peg based on your seasonal low point is an effective purchase price reduction. When closing occurs ahead of a seasonal ramp, you will be forced to leave substantial excess operating cash in the company to fund receivables and inventory, effectively funding the buyer's working capital out of your proceeds.

First, reject short-tail trailing averages that do not reflect a complete annual business cycle. Insist on a trailing twelve-month average as the starting baseline. A full twelve-month calculation captures both the cash-draining peaks and the cash-generating troughs, providing a normalized working capital baseline.

Second, introduce a seasonality matrix or monthly working capital pegs. If the deal closes in month six, the required working capital should be benchmarked against the historical average for month six, not an annual or trough average. Setting a dynamic peg tied to the specific closing month ensures the target reflects the actual capital needed to operate at that point in the cycle.

Third, review the classification of short-term assets and liabilities. Ensure customer deposits and deferred revenue are treated consistently on both sides of the ledger. If the buyer insists on a higher target peg, demand that the increase be added dollar-for-dollar to the cash consideration paid at close.

Audit your monthly working capital history across the past three years. When you present concrete data showing how accounts receivable and inventory expand during seasonal build-ups, you strip the buyer of the ability to use arbitrary averages that strip your cash.