Most buyers and sellers negotiate hard on the purchase price and then barely discuss net working capital until late in the process. That’s a mistake. The working-capital adjustment is where a deal’s economics quietly shift — and it’s one of the most common sources of post-close disputes.
What the peg is, in plain terms
When you buy a business on a cash-free, debt-free basis, the seller is still expected to leave behind a “normal” level of working capital — enough receivables, inventory, and payables for the business to keep operating the day after close, without you having to inject cash. That normal level is the peg (also called the target).
At close, actual working capital is compared to the peg. If the business is delivered with more working capital than the peg, the buyer pays the seller the difference. If it’s delivered with less, the price comes down. Simple in concept — contentious in practice.
Why it’s so contested
Because almost every input is a judgment call:
- What period do you average? A trailing-twelve-month average smooths seasonality; a shorter window can be skewed by a single strong or weak month.
- What counts as working capital? Deferred revenue, customer deposits, accrued bonuses, and related-party balances can be argued onto either side of the line.
- How do you treat seasonality? A business that builds inventory before a busy season needs a different peg depending on when it closes.
- Is the trend moving? If working capital has been creeping up, an average of the past year may understate what the business truly needs.
Each of these is worth real money, and each is easier to win when it’s grounded in a clean analysis rather than a gut number.
A well-supported peg is worth more than a favorable one. The number that holds up is the number that survives the true-up.
How diligence protects you
A proper net working capital analysis lays out the monthly trend across the review period, normalizes for one-time swings and non-operating items, and proposes a target you can actually defend. For a buyer, that means not overpaying at close and not getting surprised in the post-close true-up. For a seller, it means not leaving excess cash trapped in the business — and not conceding a peg that’s set artificially high because no one did the work to argue otherwise.
It’s the kind of number that’s invisible until it costs you. Done right, it’s one of the clearest places where good diligence pays for itself many times over.