The Working Capital Peg Is the Second Negotiation — Don't Lose It

How the working capital target gets set, gamed, and quietly re-traded in the two weeks before close.

Every buyer negotiates the purchase price. Fewer negotiate the working capital peg. The peg — the target level of net working capital the seller must deliver at close — is where a meaningful portion of enterprise value gets moved without anyone noticing.

What the peg actually is

At close, the seller delivers the business with a defined level of current assets minus current liabilities. If they deliver more, the buyer pays a dollar-for-dollar true-up. If they deliver less, the seller writes a check. The peg is that reference number.

Where it goes wrong

• The peg is set on a single month. Seasonal businesses swing 30–40% month-to-month. A December peg on a landscaping business is a gift to the seller.
• The peg excludes AR aging. A $2M AR balance with 40% over 90 days isn't $2M of working capital. It's $1.2M and a collection problem.
• The peg includes cash. Rare, but it happens on sloppy LOIs. Cash should be delivered separately on a cash-free / debt-free basis.
• The definition of "current" drifts. Deferred revenue, customer deposits, and accrued PTO all belong in the calculation and often aren't.

The right process

Ask for a trailing-twelve monthly working capital schedule at LOI. Average it. Adjust for known seasonality. Write the definition into the purchase agreement in unambiguous language — including which GAAP conventions apply. Then have your QofE provider tie it out at close.

The peg is worth the same attention as the multiple. Treat it that way.