The buyer insists on a single dollar figure for our Net Working Capital target, but our monthly receivables and inventory fluctuate widely. How do we negotiate a working capital collar or deadband to prevent post-close true-up battles?

Question

Tyler Smith · Accepted Answer

Agreeing to a rigid, single-point Net Working Capital target when your balance sheet naturally experiences cyclical swings is an open invitation for post-closing conflict. If your target is set at three million dollars and actual working capital delivered at close comes in at two million nine hundred and fifty thousand dollars, you owe the buyer fifty thousand dollars out of your escrow, even though that fifty-thousand-dollar variance is normal operating noise.

To eliminate post-close friction over routine balance sheet volatility, negotiate a working capital collar, also known as a deadband or neutral band. A collar creates a range around the target where neither party owes an adjustment at closing.

Structure the collar using market-tested guidelines:

- Establish a neutral band equal to plus or minus two to five percent of the target working capital, or a fixed dollar buffer that reflects your standard thirty-day operating variance.
- If actual delivered working capital falls within the collar, the adjustment is zero, and neither party pays.
- If working capital lands outside the collar, specify whether the true-up applies only to the excess beyond the band or resets back to the base peg figure. The cleaner seller-friendly mechanism is paying only for amounts that exceed the boundary.

Coupling this collar with an agreed-upon sixty-day calculation methodology prevents buyers from using working capital true-ups as an artificial purchase price discount. It allows both parties to complete the closing without turning ordinary monthly inventory cycles into legal disputes.