Our business experiences significant seasonal spikes in working capital. How do we structure the working capital peg so we do not end up writing a massive check to the buyer at closing?

Question

Tyler Smith · Accepted Answer

A standard twelve-month trailing average is the most common way buyers calculate a net working capital peg. However, if your business has significant seasonality or is growing at a rapid double-digit pace, a simple historical average is highly inaccurate and will likely force you to leave excess cash in the business or write a check at the closing table.

To prevent this, you must negotiate a seasonal or run-rate working capital peg. If your transaction is closing immediately after a peak sales season, your accounts receivable will be high, which artificially inflates your net working capital. You must adjust the peg to reflect this temporary spike, ensuring that the cash required to collect those receivables remains with you as the seller.

Work with your financial team to build a daily and monthly cash flow model. Present this data to the buy-side Quality of Earnings team, proving that your working capital cycle behaves predictably throughout the year. Use your weekly scorecard metrics to demonstrate how quickly your receivables convert to cash.

If the buyer resists, suggest a post-closing adjustment mechanism. Under this structure, the working capital target is set provisionally at closing, but the final reconciliation does not occur until ninety or one hundred and twenty days post-close. This allows the seasonal cycle to play out, ensuring that the actual cash and accounts receivable balances normalize before the final purchase price adjustment is calculated.