Our business experiences highly seasonal cash flows, and the buyer is insisting on a standard trailing twelve-month average to set our Net Working Capital peg, which heavily penalizes us because we are closing during our peak inventory-building season. How do we structure a seasonal working capital peg to protect our cash?

Question

Tyler Smith · Accepted Answer

Setting a standard twelve-month average Net Working Capital peg for a seasonal business is a recipe for leaving your hard-earned cash on the table. If you close during your peak inventory-building season, your accounts receivable and inventory will be temporarily high, meaning you will be forced to leave more cash in the operating account to meet a flat peg.

To protect your cash proceeds, you must insist on a seasonal working capital peg. Instead of a simple twelve-month average, propose a monthly or quarterly average that reflects the historical working capital levels for that exact time of year.

Use your historical balance sheet data to build a clear, seasonal grid. Show the buyer that your working capital naturally fluctuates by thirty or forty percent depending on the quarter.

By establishing a peg that is relative to the closing month, you ensure that you are only leaving a normalized amount of operational cash in the business.

We use our weekly EOS financial tracking to keep our balance sheet data immaculate and readily accessible. Having this historical data organized makes it impossible for the buyer to argue that your seasonal fluctuations are anomalies. It proves that your cash needs are predictable, cyclical, and fully accounted for.