The working capital workstream.

Working capital adjustments are where deals get re-traded after LOI.

The peg is set at LOI. The schedule is drafted post-LOI. The trailing 12-month average is calculated in diligence. If those three workstreams are not sequenced together, the buyer pays twice for the same cash and the seller signs a deal they do not actually agree with.

A clean working capital workstream looks like this:

1. Anchor the peg at LOI as a trailing 12-month normalized average. 2. Define the schedule lines in the LOI, especially deferred revenue and accrued vacation. 3. Build the dispute resolution mechanic in the LOI itself, with a 30-day post-close window. 4. Fund the true-up payment out of escrow, not out of seller proceeds.

Anchor the peg. "Trailing 12-month" because monthly working capital fluctuates and a single month would unfairly favor either side. "Normalized" because the trailing 12 months includes a seasonal pattern that needs to be smoothed out. For a home services business with higher receivables in summer and lower in winter, a trailing 12-month average smooths this out.

Define the schedule lines. The standard schedule includes: accounts receivable (net), inventory at cost, prepaid expenses, accounts payable, accrued expenses, customer deposits, deferred revenue. What gets fought:

Cash and cash equivalents. Standard answer: no. Income tax accruals. Standard answer: no. Capital expenditures in process. Standard answer: no.

Negotiate each in the LOI.

The dispute resolution mechanic. Four sub-provisions in the LOI:

(a) Buyer calculates the final working capital within 60 days of close. (b) Seller has 30 days to dispute. (c) Disputes go to a pre-named neutral accountant within 60 days. (d) Each side pays its own fees up to a defined cap; loser pays above the cap.

Fund the true-up out of escrow. If the working capital true-up is paid by the seller post-close, the seller has to write a check. Sellers do not like writing checks post-close. If the true-up is funded out of escrow, the math is clean.

The escrow funding amount should be 1.5 to 2x the expected variance.

If working capital is a fight, it is because one of those four steps got skipped. Skip none of them.