During LOI drafting, the buyer proposes a strict dollar-for-dollar working capital true-up at closing that could trigger immediate post-close wire demands over minor inventory shifts. How do we negotiate a working capital collar or dead-band into the purchase agreement to prevent post-close cash leakage?

Question

Tyler Smith · Accepted Answer

Standard purchase agreements require a net working capital true-up at closing against an agreed target peg. In a pure dollar-for-dollar structure, if your final working capital is fifty thousand dollars below the peg on a forty-million-dollar transaction, you must wire that exact amount back to the buyer post-close. This creates friction, petty accounting disputes, and unnecessary escrow exposure over ordinary operational fluctuations.

To prevent post-closing cash leakage, negotiate a working capital collar, also known as a dead-band or basket, into your definitive agreement. A collar establishes an agreed range around the target working capital peg within which neither party owes an adjustment.

For example, if your agreed working capital peg is three million dollars, you negotiate a two-hundred-thousand-dollar collar. If closing working capital lands between 2.9 million and 3.1 million dollars, the purchase price remains unchanged and zero cash changes hands. If working capital falls outside the band, adjustments only apply to the dollar amount exceeding the boundary, or alternatively, adjust back to the peg depending on your negotiated terms.

Establish this collar during the letter of intent phase rather than waiting for definitive purchase agreement drafting. Your finance seat must provide trailing twelve-month daily or weekly working capital cycles during diligence to prove the historical volatility band of your receivables, payables, and inventory.

When you demonstrate that working capital naturally fluctuates within a predictable band as part of normal operations, institutional buyers will accept a reasonable collar. This protects your closing proceeds and stops the buyer from using minor working capital variations as an arbitrary purchase price reduction.