The buyer wants to set a fixed Net Working Capital peg with a dollar-for-dollar cash adjustment at close, but our inventory and collections swing widely throughout the year. How do we negotiate a working capital collar to prevent normal operational variance from reducing our closing cash?

Question

Tyler Smith · Accepted Answer

A rigid Net Working Capital peg with dollar-for-dollar true-up mechanics creates substantial financial risk for businesses with cyclical inventory or billing cycles. Under a rigid peg, if your actual working capital at the closing table lands even twenty thousand dollars below the target, your cash proceeds are docked dollar-for-dollar. This penalizes the owner for ordinary, healthy operational cash cycles that have no impact on the underlying earnings power of the business.

Negotiate a working capital collar, also known as a working capital bandwidth or corridor. A collar establishes an agreed buffer zone around the working capital target, typically set between two percent and five percent of the baseline peg. Under this structure, no purchase price adjustments are made by either party as long as final closing working capital lands within that defined band.

Purchase price true-ups only occur if the actual working capital breaches the outer collar boundaries, and agreements can be drafted so adjustments apply solely to the dollars outside the corridor rather than the entire variance. Define working capital components clearly in the LOI, explicitly excluding cash, debt, transaction expenses, and shareholder receivables. Base your target calculations on a normalized trailing twelve-month average using consistent accrual accounting. Track your working capital metrics weekly on your EOS Scorecard so you can project your position accurately well before closing.