I'm selling my seasonal HVAC business (busy summers, dead winters) and the buyer's accountant keeps pushing for a big working capital adjustment tied to the off-season trough. My position is that the trough is a known, predictable feature of the business, not a defect to be priced out. How have others handled seasonality in the NWC peg without giving away the farm?
Seasonality
Seasonality impact on working capital adjustments
You need a monthly average,not a year-end snapshot. Pick a 12-month trailing average of AR + inventory - AP and use that as the peg. Otherwise whoever sets the closing date picks the winner.
Or just tell them the trough is where the business lives half the year and if they don't like it they can buy a landscaping company. Half joking.
The buyer's accountant is doing their job. A seasonal business genuinely does need more cash cushion at the the bottom of the cycle, and whoever owns it post-close eats that. So there's a real argument on their side, it's just a negotiation over how much. 12-month average is the defensible middle ground, but if the trough is deep they'll push for a low-month peg and you'll push for the average.
One more thing that bit me on a prior deal: make sure the peg is defined on the same accounting basis as the historical average you're showing them. We had a fight because the target's 'average' included some prepaid items that the peg definition excluded.
What's your monthly spread? If December is 60% below July you're not arguing about a peg, you're arguing about who funds the slow months.
This is why I like an escrow holdback on the low-month working capital rather than trying to jam it all into the peg. Buyer feels protected, you don't hand over a chunk of enterprise value for a cash cycle you've survived for a decade.
pixel_pusher roughly 55-60% swing July vs January. rustbelt_rachel that escrow idea is interesting, did the buyer actually go for it or did it just move the fight to the holdback amount?
holdback just delays the argument. in my experience they release it grudgingly and resent you the whole year.
They went for it. But to be fair the swing was milder than yours and we capped the hlodback at a number both sides could stomach. At 55-60% I'd expect more resistance.
Also worth checking whether the buyer has a lender. A lot of SBA-styl lenders won't accept a peg that swings with seasonality because it messes with their collateral base. If they're financing this, the accountant may be constrained by the credit agreement rather than just being greedy.
Counterpoint: if their lender can't handle a normal seasonal cycle, that's a them problem, not a purchase price problem.
Steve that's true right up until the deal dies over it. Sometimes you eat the peg to get to close.
Genuinely curious what you end up agreeing to. Post an update if you close.