A purchase price built around a working-capital target only works if the target represents a genuinely normal level of the business — and for a seasonal business, closing date alone can make an otherwise ordinary number look like a shortfall.
Key takeaways
A purchase price built on a working-capital mechanism assumes the business is being delivered with enough net working capital to operate normally — not stripped of cash and receivables on the way out the door, and not artificially loaded up with inventory to inflate the number. The target the agreement sets is what defines “normal” for that specific business, and getting it wrong in either direction produces a price adjustment that has nothing to do with how the business actually performed.
One treadstonelaw.ca answer on seasonal working-capital targets puts the underlying problem plainly: a business “will look very different on the closing date than the same business measured at the low point of its cycle, even though both are entirely normal for that business.” A landscaping company, a ski-hill operator, a retailer that does a third of its year in December — each of these will show a materially different working-capital position depending on where in the calendar year the closing date lands, even though neither reading is abnormal for that specific business.
Applying “a single generic figure, or a plain trailing-average approach” — the source's own description of the default method — treats that seasonal swing as if it were a real gain or shortfall, when it is really just an artifact of the calendar.
The alternative the same source describes: parties “commonly negotiate a target that accounts specifically for the closing date's position in that cycle, sometimes using historical figures from the same point in prior years.” Rather than averaging the whole year, the target is built from what the business's working capital actually looked like on the same calendar date, or the same point in the cycle, across the last two or three years — a target that moves with the season instead of averaging it away.
The source's own advice is unambiguous: “Raise seasonality early in negotiations rather than defaulting to a generic target.” By the time the completion accounts are being prepared, the target is already fixed in the agreement — a seasonality argument raised at that stage is an argument about renegotiating the deal, not about applying it, and it rarely lands well with the other side.
The same negotiation should settle what “working capital” actually includes for the purposes of the target — whether it follows GAAP definitions exactly, or a modified definition the parties agree specifically for this deal — since a mismatch here is one more thing an accountant reviewing the target's financial statements can flag as a red flag if it moves without an obvious explanation.
Setting the target fairly is only half the mechanism. One Ontario post-closing guide describes the other half: preparing the closing balance sheet covers how the actual number gets measured on closing day, and resolving a dispute over the post-closing adjustment covers what happens when the two sides read the same books differently. All three clauses are usually drafted together, and inconsistent language between them is a common, avoidable source of a dispute that has nothing to do with how the business actually performed.
Most Canadian deals price the business on a cash-free, debt-free basis: the headline price assumes the seller keeps the cash sitting in the business and pays off its own debt at closing, and the working-capital target exists precisely to define what's left once cash and debt are stripped out of the equation. Mixing the two up — letting cash sitting in the bank count toward meeting the working-capital target, for instance — effectively lets the seller collect for the same dollar twice, once through the cash-free adjustment and again through the target. A clear definition of what counts as working capital, separate and consistent from what counts as cash or debt, is what keeps the two mechanisms from overlapping.
This is also why the seasonal adjustment discussed above has to apply consistently to both halves of the mechanism. A seasonal business that collects large deposits ahead of its busy period can show unusually high cash and unusually high deferred-revenue liabilities at the same point in its cycle — if the cash-free adjustment and the working-capital target are not drafted to treat that deposit consistently, the parties can end up disputing the same seasonal swing twice, once in each clause.
A snow-removal and landscaping business is under a purchase agreement scheduled to close in early November — a point in its cycle where seasonal deposits have been collected but most of the winter season's costs have not yet been incurred, pushing working capital well above what the same business shows in July. Using a flat trailing-12-month average as the target would have set the bar using a blend of both seasons, understating what a normal November balance sheet actually looks like.
Instead, the parties agreed — during negotiation, not at closing — to set the target using the average of the business's actual working-capital position on November 1st across the prior three years: an illustrative $265,000, $278,000 and $271,000, averaging to a $271,333 target. Because that figure was built from the same calendar point each year, it reflected the business's genuinely normal November position rather than penalizing the buyer, or the seller, for when in the calendar the deal happened to close.
It has to be defined in the purchase agreement itself — usually current assets like receivables and inventory, minus current liabilities like payables, with specific exclusions the parties negotiate. It is not automatically the same figure a set of financial statements would report under general accounting standards unless the agreement says so.
No, and it often doesn't. The agreement can adopt a modified definition specific to the deal — the key requirement is that the definition is consistent between the target-setting exercise and the completion accounts that later test it, not that it tracks any external accounting standard precisely.
Then a flat trailing-average approach is usually a reasonable, low-friction way to set the target, and the same-period historical-figures method described here is unnecessary complexity. The seasonal adjustment matters specifically where the business's working-capital position genuinely varies by time of year.
A short call is enough to check whether your target actually reflects a normal balance sheet for this specific business.
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