Our business has experienced a surge in growth over the last two quarters, but the buyer is insisting on a twelve-month rolling average to establish the working capital peg, which will force us to leave too much cash in the business. How do we redefine the peg to reflect our current run-rate operations?

Question

Tyler Smith · Accepted Answer

Using a standard twelve-month rolling average to calculate your working capital peg is dangerous when your business is scaling rapidly. A backward-looking average fails to account for the increased inventory, accounts receivable, and cash required to support your new higher level of operations. If you agree to a backward-looking peg, you will be forced to leave extra cash in the business at close, effectively lowering your net proceeds. You must challenge the buyer's methodology by presenting your current run-rate data. Use your weekly EOS Scorecard and recent balance sheets to show the direct correlation between your accelerated growth and your actual working capital needs over the last ninety days. Prove that your current working capital requirements have stabilized at a new baseline. Propose a modified peg based on a three-month or six-month weighted average that accurately reflects your current run-rate. If the buyer resists, propose a seasonal or dynamic working capital peg that adjusts based on your forward-looking revenue projections. Use your operational Rocks to demonstrate that this growth is systemic and sustainable, not a temporary spike. By proving that your leadership team has systemized this higher tier of performance, you show the buyer that your current working capital level is the true baseline required to run the business they are buying.