The same completion balance sheet run through four price adjustment mechanisms: pound for pound, a de minimis, a collar and a capped collar, with the asymmetric version buyers ask for.
A working capital collar is a band around the peg inside which the purchase price does not move; outside it, only the excess beyond the band is paid. With an illustrative peg of 20.00 million and a collar of 0.50 million either side, a seller who delivers 21.10 million of working capital at completion receives 0.60 million more for the shares, not 1.10 million. The collar is a deductible, and it costs one side or the other up to its full width every time the delivered figure lands outside it.
Worked in full in Closing the Deal by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Collars exist because completion accounts are estimates prepared under time pressure, and arguing over a few hundred thousand euros of accruals costs more in fees than it is worth. The problem is that practitioners use "collar", "de minimis" and "threshold" loosely, and the three are drafted very differently. Run the same balance sheet through each and the price differs by up to half a million on an ordinary deal.
| Input | Value |
|---|---|
| Net working capital peg (target) | 20.00 |
| Equity price before the working capital adjustment | 60.00 |
| De minimis (tipping threshold) | 0.25 |
| Collar, either side of the peg | 0.50 |
| Cap on the adjustment, either direction | 2.00 |
Step 1: the difference. D = delivered working capital − peg. At 21.10 million delivered, D = +1.10.
Step 2: apply the mechanism the SPA actually contains.
Pound for pound: Adjustment = D = +1.10
De minimis (tipping): Adjustment = D if |D| > 0.25, else 0 = +1.10
Collar (deductible): Adjustment = sign(D) × max(0, |D| − 0.50) = +0.60
Excel: =SIGN(D)*MAX(0,ABS(D)-Band); with a cap, =MAX(-Cap,MIN(Cap,SIGN(D)*MAX(0,ABS(D)-Band)))
Step 3: the price. Equity price = 60.00 + 0.60 = 60.60 million under the collar, against 61.10 pound for pound. The 0.50 the seller does not receive is exactly the collar's width: once the figure is outside the band, the band is always deducted in full.
| Delivered | D | Pound for pound | De minimis | Collar | Collar, capped |
|---|---|---|---|---|---|
| 19.80 | −0.20 | −0.20 | 0.00 | 0.00 | 0.00 |
| 20.40 | +0.40 | +0.40 | +0.40 | 0.00 | 0.00 |
| 19.30 | −0.70 | −0.70 | −0.70 | −0.20 | −0.20 |
| 21.10 | +1.10 | +1.10 | +1.10 | +0.60 | +0.60 |
| 17.20 | −2.80 | −2.80 | −2.80 | −2.30 | −2.00 |
| 23.60 | +3.60 | +3.60 | +3.60 | +3.10 | +2.00 |
Three things stand out. The de minimis only matters at small differences, and it creates a cliff: a difference of 0.25 pays nothing, a difference of 0.26 pays 0.26. The collar matters at every difference, because it shaves 0.50 off any figure outside the band. And the cap only bites in the tail, where at 23.60 million it takes a further 1.10 off the seller and at 17.20 million it protects the seller by 0.30. In the 17.20 case the capped collar leaves the price at 58.00 million against 57.70 uncapped.
The collar is 1.00 million wide in total, and that is the figure to set against the precision of the completion accounts. If the accruals, stock counts and cut-off judgements in a set of completion accounts can reasonably move working capital by a few hundred thousand euros, a band of that size saves both sides an expert determination. If the business swings by millions from one month to the next, the band is too small to absorb the noise and too large to ignore, and the peg definition deserves the attention instead.
A buyer will sometimes propose that shortfalls are paid pound for pound from the peg while excesses are paid only beyond the band. The term sheet still says "collar of 0.50", but it now runs one way.
| Delivered | D | Pound for pound | Symmetric collar | Asymmetric collar |
|---|---|---|---|---|
| 18.00 | −2.00 | −2.00 | −1.50 | −2.00 |
| 19.00 | −1.00 | −1.00 | −0.50 | −1.00 |
| 19.60 | −0.40 | −0.40 | 0.00 | −0.40 |
| 20.30 | +0.30 | +0.30 | 0.00 | 0.00 |
| 21.00 | +1.00 | +1.00 | +0.50 | +0.50 |
| 22.00 | +2.00 | +2.00 | +1.50 | +1.50 |
The asymmetric collar is not a tidying-up clause. It costs the seller up to 0.50 million whichever way the completion accounts fall: against pound for pound on any excess, and against the symmetric collar on any shortfall. On a 60.00 million price that is 0.83 per cent.
A collar is neutral only if the expected delivered figure sits on the peg. A seller who expects to deliver 20.80 million, because the business grows or because completion falls in a high month of a seasonal cycle, gains 0.80 pound for pound and only 0.30 with the collar: the band costs that seller its full 0.50. The question to ask before agreeing a collar is therefore where the completion figure is likely to land, which depends on how the peg was set. A twelve-month average peg against a completion month in the high season puts the expected figure well above the peg, as the worked example in how to calculate a net working capital peg shows.
Two drafting points follow from the arithmetic. State whether the threshold is tipping or deductible, because "collar" is used for both. And state whether the cap applies before or after the band, because a 2.00 cap on the difference and a 2.00 cap on the adjustment give different prices in the tail.
The twelve-month working capital cycle, the five pegs it supports and the adjustment each produces month by month are in the free workbook for this case.
A de minimis is a tipping threshold: below it nothing is paid, above it the whole difference is paid from the first euro. A collar is a deductible: only the part beyond the band is paid. On an illustrative 20.00m peg, delivering 21.10m pays 1.10m with a 0.25m de minimis but 0.60m with a 0.50m collar.
Large enough to absorb estimation noise in the completion accounts, small enough not to transfer real value. A 0.50m band on a 60.00m equity price is 0.83 per cent of the price, and it is the most either side can lose to it. Size it against the normal monthly swing of the business, not as a percentage of the price.
No. Buyers sometimes ask for shortfalls to be paid pound for pound from the peg while excesses are paid only beyond the band. At 19.00m against a 20.00m peg the seller then pays 1.00m, but at 21.00m receives only 0.50m. Each side should price the version on the table, not the symmetric one in the term sheet.
This article is one calculation from Closing the Deal. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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