Working Capital Peg
The agreed target level of working capital the seller is expected to deliver at closing — the benchmark against which actual closing working capital is measured for purchase price adjustment.
Full Definition
The working capital peg (also called the "working capital target" or "WC target") is the single most negotiated number in most M&A deals beyond purchase price itself. Setting the peg $200K too high means the seller effectively delivers $200K less than planned at closing. Setting it $200K too low means the buyer gets a business without adequate working capital and may need to inject cash immediately post-close.
How it actually works: Peg-setting methods: (1) Trailing 12-month average — most common; average monthly net working capital over the last 12 months, giving a normalized "typical" level; (2) Trailing 3-year average — smooths out anomalies but may not reflect recent business scale; (3) Most recent month-end — captures current state but may include unusual items; (4) Seasonal average — for seasonal businesses, average at specific times of year; (5) Scaled to revenue — for growing businesses, WC as a percentage of revenue applied to run-rate revenue.
Sellers prefer methods that minimize peg (lower bar to deliver at closing). Buyers prefer methods that include all needed working capital. Negotiation often settles on defensible 12-month average with specific adjustments for growth, seasonality, or one-time events.
Peg components: typically includes AR, inventory, prepaid expenses, AP, accrued expenses, and similar operating items. Excludes: cash (swept separately), debt (paid off separately), specific debt-like items, restricted cash, deferred tax assets/liabilities. Each inclusion/exclusion is negotiated.
Seller vs. Buyer Perspective
Negotiate the peg hard in the LOI when you have maximum leverage. Key points: (1) methodology — push for 12-month simple average without cherry-picked quarters; (2) seasonality adjustment — if your business has predictable patterns, normalize them; (3) growth adjustment — if the business has grown, the peg should reflect current scale, not trailing small operation; (4) specific inclusions/exclusions — every item worth money; (5) collar or bands — $100-200K "no adjustment" bands reduce small disputes. Prepare detailed monthly WC data for the last 24-36 months to support your methodology. Close on a date when your WC naturally tracks peg — often end of a strong collection month.
The peg protects you against receiving a business starved of working capital. Build carefully: (1) require detailed historical working capital analysis (QoE should provide); (2) use methodology appropriate for the business cycle (12-month average for most; quarterly average for highly seasonal); (3) ensure the peg reflects growth trajectory if business has been growing; (4) adjust for unusual items (one-time spikes or dips); (5) define inclusions/exclusions precisely; (6) consider a collar if disputes likely. Don't set the peg artificially high — creates deal-killing disputes.
Real-World Example
A $3.5M EBITDA distribution business in negotiation. Historical monthly WC data: ranges from $2.1M (post-Q1 collection) to $3.3M (pre-Q4 inventory build). 12-month simple average: $2.6M. 3-year average: $2.4M (reflecting recent growth). Seller wants peg at $2.4M (3-year average); buyer wants peg at $2.6M (12-month). Both defensible. Parties compromise at $2.5M with $100K collar (no adjustment between $2.4M and $2.6M actual). Business closes in late October (post-Q3 collections, pre-Q4 inventory build). Actual closing WC: $2.55M. Within collar — no adjustment. Had buyer pushed for $2.8M peg, seller would have faced $250K deduction; had seller pushed for $2.2M peg, buyer would have paid $350K more. The compromised $2.5M peg with $100K collar produced zero adjustment — a good outcome for both sides reflecting natural variation.
Why It Matters & Common Pitfalls
- !Timing of closing affects economics. Closing date relative to working capital cycle materially affects the calculation.
- !Seasonality normalization. Seasonal businesses need careful peg design.
- !Growth adjustment. Trailing averages may not reflect current business scale. Adjust for growth explicitly.
- !One-time items. Unusual items (inventory build for special project, AR spike from big order) should be normalized out.
- !Collar mechanics. Bands reduce small-dollar disputes. $100-200K common for mid-sized deals.
- !Documentation. Detailed monthly WC schedules support negotiation and resolve disputes.
- !Pre-close management. Sellers can manage WC in the 30-60 days before close to optimize their position.
- !Post-close reconciliation timing. 60-120 days typical for final WC adjustment.
Frequently Asked Questions
What is a working capital peg?↓
How is the working capital peg calculated?↓
What is a collar in working capital?↓
Related Terms
Working Capital Adjustment
A purchase price adjustment comparing the business's working capital at closing to an agreed target (the "peg") — with any shortfall deducted from seller proceeds and any surplus added.
Net Working Capital
The capital tied up in a business's operating cycle — typically defined as current assets (AR, inventory) minus current liabilities (AP, accrued expenses), excluding cash and debt — and one of the most negotiated purchase price adjustments.
Post-Closing Adjustment
Reconciliation of estimated closing balances (working capital, debt, cash) to final actual amounts, with net difference paid between buyer and seller — typically finalized 60-120 days after closing.
Cash-free, Debt-free
A standard M&A pricing convention where the seller keeps all cash at closing and pays off all debt, so the purchase price reflects only the value of the operating business itself.
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Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026