Our business has high seasonality, with inventory peaking in the spring, but we are scheduled to close our transaction in the summer. How do we structure the working capital peg so we do not get penalized for seasonal inventory fluctuations at closing?

Question

Tyler Smith · Accepted Answer

A standard cash-free, debt-free transaction requires the seller to deliver the business with a normal level of net working capital at closing. If your business is highly seasonal, a simple twelve-month average working capital calculation can be highly damaging, depending on the exact date of your closing.

If you close during your peak inventory season, you will leave a massive amount of cash tied up in inventory on the balance sheet, effectively giving the buyer a windfall while reducing your net cash proceeds. Conversely, if you close during a low-inventory period, you may be forced to leave a cash cushion to fund the upcoming seasonal build.

To protect your proceeds, you must negotiate a seasonal working capital target rather than a static twelve-month average. Start by mapping out your monthly net working capital requirements over the past three to five years to establish clear historical patterns. Use this data to propose a sliding-scale working capital peg that adjusts based on the specific month of closing.

Another approach is to structure a post-closing adjustment mechanism that accounts for seasonality. This agreement should state that any working capital surplus or deficit at closing will be reconciled after a set period, such as one hundred and twenty days, when the seasonal cycle has completed. This ensures that both parties are treated fairly and that you are paid for the cash you invested in building seasonal inventory. Keep these calculations transparent to avoid disputes during the post-close reconciliation phase.