Selling A Seasonal Business: The Working Capital Trap

The situation

Nirosha, a plumber, and Marek, an electrician, had spent a decade and a half building a swimming pool installation and service business together in Ajax. Between Nirosha's plumbing background and Marek's electrical licence, the two of them could handle almost every part of a pool build in-house, from the underground lines to the heater and lighting hookup. By the time they decided to sell, the business employed a small seasonal crew and had a loyal base of maintenance clients across the eastern GTA.

An investor named Meron came forward with an offer of roughly $1.5 million for the business, structured as a purchase of its assets rather than its shares. Nirosha and Marek's accountant negotiated the broad strokes of the deal directly with Meron's side, and the two partners signed a letter of intent before bringing a draft purchase agreement to Treadstone Law for a pre-closing review. Closing was set for six weeks out, in mid-April, at the very start of the pool season.

Like most trades-based businesses, the company's finances moved in a predictable annual rhythm. Deposits and service contract billings climbed sharply from May through August, tapered off through the fall as installation work wound down, and sat at their lowest point in the early spring before the season's first jobs were even booked. Nirosha and Marek understood that rhythm intimately from running the business day to day, but neither of them had thought to ask how the sale agreement's numbers would treat it. Their accountant had focused on the purchase price and the allocation between assets, which was the part of the deal that felt most familiar from past tax filings, and had not scrutinized the mechanics of the adjustment clause tucked further into the document.

The legal problem

Buried in the draft asset purchase agreement was a working capital adjustment clause — a mechanism common in business sales, and one that trips up sellers more often than almost any other term. The idea behind it is fair on its face: the sale price assumes the business will be handed over with a normal, healthy level of working capital (cash, receivables, and inventory, net of payables) so the buyer can keep operating without injecting more money on day one. If the actual working capital at closing comes in below an agreed target, the seller repays the shortfall out of an escrow holdback. If it comes in above target, the seller gets to keep the excess.

The problem was how the target had been calculated. The draft agreement, drawn up from figures Meron's accountant had pulled from the business's summer months, set the target at about $300,000 — a figure that reflected the business at the peak of pool season, when receivables from installation deposits and service contracts were at their highest. But closing was scheduled for mid-April, weeks before that seasonal ramp-up began. At that point in the year, the business typically held closer to $150,000 in working capital, simply because the busy season's invoicing hadn't started yet.

Measured against a peak-season target, an off-season closing would show a working capital shortfall of roughly $150,000 — nearly the entire $150,000 escrow holdback the agreement proposed setting aside from the purchase price. Nirosha and Marek's accountant had negotiated the price and the broad deal terms competently, but the working capital mechanism is a legal drafting point as much as an accounting one, and nobody on the seller's side had asked the question that mattered most: a target measured against what point in the year?

What we did

1. Reviewed the draft agreement before it was signed. Because Nirosha and Marek brought the purchase agreement to Treadstone Law before executing it — not after — there was still room to renegotiate. A letter of intent is typically not binding on final price or mechanics, and the working capital clause had not yet been locked in.
2. Quantified the exposure in plain numbers. Our team modelled what the clause would actually cost at an April closing using the business's own historical monthly figures, showing Nirosha and Marek a projected shortfall of roughly $150,000 against their $150,000 escrow — effectively wiping out the entire holdback with nothing returned to them after closing.
3. Pushed for a seasonally matched target. We proposed replacing the flat target with one calculated from the same calendar month in the prior year, adjusted for the business's growth — a standard fix for seasonal businesses, but one that has to be negotiated into the agreement rather than assumed.
4. Negotiated a compromise with the buyer's counsel. Meron's lawyer resisted a full switch to a matched-month target, arguing the buyer needed a floor to protect against a stripped-out business at closing. The parties settled on a target of $180,000 — still higher than the business's typical April working capital, but well below the original $300,000 figure, with a defined post-closing process for calculating the actual number and resolving any dispute over it.
5. Worked with the accountant on the closing statement. After closing, our team coordinated with Nirosha and Marek's accountant to prepare the actual working capital calculation under the agreed formula, and reviewed Meron's competing calculation line by line before the two sides settled on a final figure.

The outcome

The business's actual working capital at closing came in at roughly $150,000, in line with what the historical figures had predicted. Against the renegotiated target of $180,000, that left a shortfall of about $30,000, which was paid to Meron out of the $150,000 escrow. The remaining $120,000 was released back to Nirosha and Marek roughly ninety days after closing, once both sides signed off on the final calculation.

Under the original draft, the same closing would have produced a shortfall of about $150,000 against the same $150,000 escrow — the entire holdback gone, with the two partners walking away from a business they had built over fifteen years without a dollar of the money they had set aside to receive back. The renegotiation did not eliminate the shortfall. Nirosha and Marek still had to write off $30,000 they had expected to keep. But it converted a near-total loss of the escrow into a manageable one, and it did so before either partner had signed anything binding on the point.

The dispute resolution process built into the renegotiated clause also mattered more than either partner expected going in. Meron's accountant initially calculated the actual closing-date working capital a few thousand dollars lower than Nirosha and Marek's own figures, largely over how a handful of prepaid service contracts should be classified. Because the amended agreement specified exactly which accounting method governed that calculation, the disagreement was resolved by walking through the ledger against the agreed formula rather than by either side threatening to escalate the dispute, and it added only a few days to the post-closing settlement rather than months of back-and-forth.

The deal closed on schedule in April. Meron took over the business with its seasonal ramp-up just getting underway, and Nirosha and Marek moved on with the bulk of their sale proceeds and holdback intact.

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