Why the Working Capital Peg Exists
When a buyer acquires a business, they expect to receive a company that can operate normally on day one without requiring an immediate cash infusion. The working capital peg is the mechanism that enforces this. It's set based on the "normal" or "average" level of working capital the business carries, typically calculated as a trailing 12-month average.
Without a peg, a seller could drain receivables, let payables balloon, or run inventory down in the weeks before close — pocketing extra cash while leaving the buyer with a business that needs immediate working capital to function.
How the Peg Is Calculated
The peg is negotiated during the LOI or purchase agreement phase, typically driven by QoE findings. Common methods:
- Trailing 12-month average — Most common. Average the last 12 monthly balance sheets.
- Trailing 3- or 6-month average — Used when the business is seasonal or recently changed structure.
- Specific date snapshot — Sometimes used for simpler businesses.
What's Included in Working Capital
The definition of "working capital" for peg purposes is negotiated, not assumed. Common inclusions and exclusions:
- Included: Accounts receivable, inventory, prepaid expenses, accounts payable, accrued liabilities
- Often excluded: Cash (typically a separate "debt-free, cash-free" adjustment), deferred revenue, current portion of long-term debt, owner-related accruals
Post-Close True-Up
Working capital is typically settled within 60–90 days of close. The buyer's accountants calculate actual closing working capital, compare it to the peg, and either pay the difference to the seller or bill the seller for a shortfall. This process is a common source of post-close disputes — sellers should budget for it and retain their own accountant to review the buyer's calculation.
What's Your Business Worth Today?
A 30-minute confidential conversation gives you a realistic valuation range — and clarity on the factors that are moving your multiple up or down.
Request a Free Valuation