Answers / Financial Due Diligence
Explain the concept of 'normalized net working capital' for a seasonal business. How would you calculate the peg in a completion accounts mechanism?
An advanced Financial Due Diligence question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
For a seasonal business, normalized NWC should reflect the average level over the full cycle, not just a point in time. I'd calculate a trailing 12-month average of NWC components, or use a 'normalized' month (e.g., mid-season). In completion accounts, the peg is often set as a fixed amount, but parties may agree on a formula based on average NWC to avoid seasonal distortions. Alternatively, a collar can be used. The key is to ensure the peg represents the ongoing operational needs.
WHAT INTERVIEWERS LISTEN FOR
- ✓Seasonal business: use average over full cycle
- ✓Peg: fixed amount or formula based on average
- ✓Avoid point-in-time distortions
COMMON MISTAKES
- ✗Using a single month's NWC as the peg
- ✗Ignoring seasonality and using year-end NWC
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