The buyer wants a strict dollar-for-dollar working capital true-up at closing, but our inventory and receivables fluctuate significantly from week to week. How do we negotiate a working capital collar to prevent minor fluctuations from triggering post-close purchase price adjustments?

Question

Tyler Smith · Accepted Answer

In a standard middle-market transaction, net working capital is pegged to a specific historical average, usually twelve months. If closing working capital comes in one dollar below that target peg, the purchase price is reduced dollar for dollar. If it comes in above, the buyer pays you the difference.

The problem with a fixed peg is that normal operational volatility creates friction. A single delayed customer payment or an early supplier delivery right before the closing date can trigger months of post-close accounting disputes over negligible dollar amounts.

To solve this, negotiate a working capital collar, also known as a deadband or corridor.

A working capital collar establishes an agreed buffer zone around the target peg, typically two to five percent of target working capital. If closing working capital lands anywhere within that range, no post-closing adjustment occurs in either direction. The purchase price remains unchanged.

Adjustments only kick in if working capital breaches the outer boundaries of the collar:
- If working capital falls below the lower boundary of the corridor, you owe the buyer the deficit calculated from the lower boundary, not the midpoint peg.
- If working capital exceeds the upper boundary, the buyer pays you the surplus calculated from that upper boundary.

This mechanism protects both parties. It stops the buyer from weaponizing standard cut-off timing differences, saves tens of thousands of dollars in post-closing dispute fees, and allows your finance seat on the Accountability Chart to close the books cleanly without arguing over daily cash variance.