A headline purchase price is not necessarily the amount a seller ultimately receives. In many business sales, the transaction assumes that the company will be delivered with a normal level of operating working capital. The difference between that expected level and the working capital actually delivered at closing can change proceeds—sometimes materially.
This mechanism is usually described as a net working capital target, working capital peg, or simply the peg. For an owner who has spent years thinking primarily about revenue, EBITDA, or SDE, the peg can feel like an obscure accounting detail. It is not. It is part of the economics of the deal.
What is a working capital peg?
The peg is an agreed benchmark for the operating net working capital a buyer expects to receive with the business. The basic concept is straightforward: a buyer generally expects to acquire an operating company with enough ordinary working capital to continue running after closing.
If closing working capital is above the agreed target, the purchase-price adjustment may favor the seller. If it is below the target, the adjustment may reduce seller proceeds. The exact mechanics depend on the purchase agreement, including the definitions, accounting principles, exclusions, and dispute procedures the parties negotiate.
This is why owners should distinguish between enterprise value and cash proceeds. A buyer can agree with the valuation of the operating business while still negotiating adjustments for working capital, debt, debt-like items, cash, transaction expenses, and other closing-balance-sheet items.
Why buyers care about working capital
Imagine buying a company that normally requires $1 million of receivables, inventory, and other operating current assets net of ordinary current liabilities to function. If the seller extracts or fails to deliver a substantial portion of that operating capital immediately before closing, the buyer may need to inject cash on day one simply to keep the business operating normally.
The peg is intended to prevent that outcome. It attempts to define the normalized amount of working capital that belongs with the operating business.
That sounds mechanical, but the difficult word is normalized. Working capital can move because of seasonality, rapid growth, unusual collections, delayed vendor payments, inventory purchases, customer deposits, year-end accounting entries, or one-time events. A single month-end balance may therefore be a poor representation of what the business ordinarily needs.
How is the working capital target determined?
There is no universal formula that produces the correct peg for every company. A common starting point is historical monthly working capital over a representative period, adjusted for unusual or non-operating items. But the appropriate period and methodology should reflect the actual economics of the business.
For example, a seasonal distributor may require significantly more inventory before its peak selling period. A fast-growing company may need more working capital today than a backward-looking average suggests. A subscription business that collects cash in advance can have a very different working-capital profile from a manufacturer carrying inventory and extending customer credit.
The analysis may also need to address items such as aged receivables, obsolete inventory, accrued payroll or bonuses, customer deposits, deferred revenue, related-party balances, unusual payables, and balances that may be treated as debt-like rather than ordinary working capital.
A simple illustration
Suppose the parties agree to a $900,000 working capital peg. At closing, working capital calculated under the purchase agreement is $760,000. Subject to the agreement's exact terms, the $140,000 shortfall may reduce the amount paid to the seller.
Now suppose the closing calculation is $980,000. The $80,000 excess may increase the amount paid.
The important point is not the arithmetic. It is that the definition and methodology determine the arithmetic. Two parties can look at the same balance sheet and reach different answers if they disagree about which accounts belong in working capital, how reserves should be calculated, or whether an obligation is operating, debt-like, or transaction-related.
Why sellers get surprised
Working-capital problems often begin well before the closing statement. Owners may focus heavily on negotiating the valuation multiple while giving less attention to the balance-sheet mechanics underneath the transaction. By the time the issue becomes concrete, the buyer may already have completed detailed financial diligence and developed its own view of normalized working capital.
Another common problem is inconsistent accounting. If monthly accruals are incomplete and large true-ups occur only at year-end, historical monthly balances may not be comparable. If receivables have aged without appropriate reserves, inventory contains slow-moving items, or liabilities are recorded inconsistently, the seller can find itself debating both the accounting and the economics at the same time.
This is closely related to broader pre-sale preparation. Clean monthly reporting, consistent account treatment, and documented assumptions make the working-capital discussion easier to defend.
What owners should do before going to market
Build a monthly working-capital history. Do not wait for a buyer to create the first serious analysis. Review the relevant balance-sheet accounts monthly across at least one representative operating cycle and understand the major movements.
Define what is genuinely operating. Cash, financing balances, transaction expenses, taxes, unusual accruals, and other items may require separate treatment. The classification can be deal-specific, so owners should not assume the accounting balance-sheet label determines the transaction treatment.
Understand seasonality and growth. Be able to explain why working capital rises or falls during the year and whether the historical period is representative of the business a buyer is acquiring.
Clean up accounting inconsistencies. A company that records payroll accruals, reserves, inventory adjustments, or other entries inconsistently creates unnecessary ambiguity. The goal is not to cosmetically improve the peg; it is to make the historical economics easier to understand and reproduce.
Watch the cash-conversion cycle. Changes in days sales outstanding, inventory days, and payment practices can reveal whether the company is temporarily pulling cash forward or pushing obligations out. A buyer may challenge a closing balance that was achieved through unusual collection pressure or delayed vendor payments.
Model proceeds, not just enterprise value. Owners should understand how debt, cash, working capital, transaction expenses, taxes, rollover equity, earnouts, and other deal terms may bridge from the headline valuation to actual liquidity.
Do not "manage" working capital just to improve the closing number
There is a difference between structurally improving a company's cash conversion cycle and temporarily manipulating balances before a transaction. Better billing discipline, inventory management, customer terms, and purchasing processes can improve the business. Delaying ordinary payments or accelerating collections purely to manufacture a closing balance may simply create a dispute or be neutralized by the negotiated methodology.
A sophisticated buyer is not only looking at the closing balance. It is looking at historical patterns and the operating requirements of the company it will own the day after closing.
Where working capital fits in exit readiness
Working capital is one example of why preparing to sell a company involves more than selecting a valuation multiple. Buyers underwrite the quality of earnings, revenue durability, customer concentration, management transferability, forecast credibility, balance-sheet requirements, and diligence evidence together.
If you are still establishing the broader picture, start with our Business Exit Readiness Checklist. If customer concentration or founder dependence are bigger risks than working capital, those issues may deserve earlier attention because they can affect how a buyer views the durability and transferability of the earnings themselves.
The owner-side takeaway
The working capital peg should not be treated as a closing-week accounting exercise. An owner considering a sale should understand the company's normal working-capital requirement, the quality of the underlying accounts, seasonal and growth effects, and the potential bridge from enterprise value to proceeds well before signing definitive documents.
That preparation does not guarantee a particular adjustment. It does something more useful: it makes the seller less likely to discover an important piece of the transaction economics only after the buyer has already formed its position.
Want to see the broader issues a buyer may challenge? Take the free Owner Value Advisory Exit Readiness Assessment. It takes about five minutes and evaluates the business across six buyer-readiness dimensions.