If your Southern California business has a busy season and a slow season, the single most overlooked line in your deal could quietly cost you six figures at closing. Negotiating working capital targets — the “peg” a buyer expects you to leave in the business — is where seasonal companies get blindsided, because the wrong reference period can turn a fair price into a meaningful haircut on the day you fund.
Owners of profitable lower-middle-market companies in Los Angeles, Orange County, San Diego, and the Inland Empire — typically $1 million to $5 million in EBITDA, selling in the $3 million to $25 million range — rarely think about working capital until a letter of intent lands. By then the buyer has usually proposed a peg that quietly favors their side. This post explains how the peg works, why seasonal swings make negotiating working capital targets so consequential, and how to set a number that reflects the real business rather than a single point on the calendar.
What the Working Capital Peg Actually Does
When you sell on a cash-free, debt-free basis, the buyer still needs the business to come with enough net working capital — receivables, inventory, and prepaids, less payables and accruals — to keep operating the day after close. The peg is the agreed target. Deliver more than the peg and the price adjusts up in your favor; deliver less and the price adjusts down.
Why it exists
The mechanism protects the buyer from a seller who strips the business of cash and collectibles on the way out the door. That is reasonable. The problem is not the concept — it is the reference period used to set the number, and that is precisely what is negotiable.
Where seasonal owners get caught
A buyer will often propose pegging to a recent month, a quarter, or a trailing period that happens to show working capital at its seasonal high. If your inventory and receivables balloon ahead of a summer or holiday peak, a peg anchored to that peak forces you to leave far more in the business than it normally carries. Negotiating working capital targets well means refusing a snapshot and insisting on a representative average.
How Seasonal Swings Turn Into Real Money
A Riverside worked example
The stakes are easiest to see in numbers. Consider a Riverside-based outdoor-services company whose net working capital peaks before the summer season and troughs in winter. The buyer wants to peg to the seasonal peak; you argue for a trailing-twelve-month average. The deal happens to close in the winter trough.
| Negotiation point | Peg at seasonal peak | Peg at 12-month average |
|---|---|---|
| Working capital target (peg) | $1,200,000 | $900,000 |
| Net working capital delivered at winter close | $700,000 | $700,000 |
| Price adjustment to seller | −$500,000 | −$200,000 |
Same business, same closing date, same delivered balance — but the peg basis alone creates a $300,000 swing in what you walk away with. A peg set at the seasonal peak hands the buyer a $500,000 downward adjustment; a peg at the true twelve-month average limits it to $200,000. That gap is the entire reason negotiating working capital targets deserves your attention before you sign anything.
Does your peg reflect a peak or an average?
Pressure-test your number against your real enterprise value with our Business Valuation Calculator before a buyer frames the peg for you.
Negotiating Working Capital Targets on Your Own Terms
You do not have to accept the buyer’s reference period. A few disciplined moves keep the peg honest and protect your closing cash.
Insist on a representative averaging period
The fairest peg for a seasonal business is usually a trailing-twelve-month monthly average, which captures both the peak and the trough rather than freezing one moment. If the buyer wants a shorter window, push for one that spans at least one full seasonal cycle. The U.S. Census Bureau explains why analysts seasonally adjust business data for exactly this reason — a single month misrepresents a cyclical operation — and the same logic should govern your peg.
Bring monthly data, not annual averages
Annual figures hide the swing; twelve months of balance-sheet detail reveals it. Walk the buyer through each month’s receivables, inventory, and payables so the average is built from evidence rather than assertion. The same documentation that supports your working capital position also strengthens your hand on price — the dollars at stake here often rival what a broker’s commission would consume, and you can see that comparison directly with our Broker Fee Savings Estimator.
Tie the peg to your closing date
If the deal must close in your trough, make sure the peg and the delivery are measured on a consistent basis. A peg built on peak balances but tested against trough delivery is the trap in the table above. Align the two, or build a seasonal collar that flexes the target to the month of close.
Define the components precisely
Spell out exactly what counts as working capital — which accruals, whether slow-moving inventory is included at full value, how to treat deferred revenue. Vague definitions become disputes during the post-closing true-up. The U.S. Small Business Administration offers a plain-English primer on working capital that is worth sharing with a family member or partner who is new to these mechanics.
Build a true-up you can live with
The peg is settled in two stages: an estimate at close and a true-up once the final balance sheet is locked, usually 60 to 90 days later. Agree in advance on who prepares the closing statement, how disputes are resolved, and a tight window for objections. A loosely worded true-up clause is where a cooperative negotiation can sour into a post-closing fight over a few hundred thousand dollars. Pair a representative peg with a disciplined true-up process and you remove most of the late-stage friction that derails seasonal deals.
Why the Buyer on the Other Side Matters
The peg is only as fair as the process around it, and that depends on who you are negotiating with.
Southern California seasonality is real and specific
SoCal businesses carry genuine seasonal patterns — outdoor and pool services that surge in summer heat, Inland Empire food processors tied to the agricultural calendar, coastal hospitality suppliers that crest with tourism, and retailers that build inventory for the holidays. An out-of-state buyer using a generic model may not appreciate how pronounced these swings are, which is exactly why your monthly documentation matters. California’s high labor and real-estate costs also mean more cash is tied up in operations than a buyer benchmarking against a lower-cost state might assume. A landscaping firm in the Inland Empire or a seafood distributor on the coast can see working capital swing dramatically between its high and low months, and a peg that ignores that range is simply mispriced. The remedy is the same in every case: show the full annual pattern and anchor the target to it.
One funded decision-maker keeps the peg honest
In a broker-run auction, the peg often gets re-traded late, after an investment committee weighs in and looks for a reason to claw value back at the eleventh hour. Dealing directly with a single funded buyer means negotiating working capital targets happens once, transparently, with the person who can actually agree to the number — no committee revisiting it after the letter of intent. That is the BizSellDirect approach: a private process, one decision-maker, and a peg you can rely on.
Set Your Peg Before a Buyer Sets It for You
Working capital is not a footnote — for a seasonal business it can be one of the largest single adjustments in the entire transaction. Before you respond to any letter of intent, know what a fair, representative peg looks like for your business and model your enterprise value with our Business Valuation Calculator so the working capital conversation starts from your numbers, not the buyer’s.
If you want a straight read on where your peg should land, we are happy to walk through it. Call us for a confidential 15-minute conversation at (949) 393-0098 or reach us through our contact page. As a direct buyer of established Southern California businesses — no brokers, no commissions, no public listing — we will tell you plainly what a representative working capital target looks like for your company.
