Our business has high seasonality, with cash needs peaking in the spring, but the buyer is proposing a flat working capital peg. How do we structure a seasonal collar?

Question

Tyler Smith · Accepted Answer

If your business experiences predictable cash flow swings throughout the year, a standard twelve-month average working capital peg can destroy your transaction value. If you close the deal during your peak inventory season, you will be forced to leave a massive amount of working capital in the business without receiving any extra compensation for it. To prevent this, negotiate a seasonal collar or a variable working capital target that changes based on the month of closing. Instead of a single static number, structure the agreement to use a target based on the historical average of that specific calendar month over the past three years. This ensures that you are only required to leave the normal operating capital necessary for that specific time of year. Use your weekly Scorecard and historical financial trends to present this data clearly to the buyer. If the buyer resists, propose a post-close adjustment mechanism that trues up the working capital once the full seasonal cycle is complete. Never let a buyer use a flat annual average to capture your peak seasonal assets for free.