Most people buying or selling a business spend their energy on the headline price and the multiple. Then, late in the process, someone mentions the net working capital peg, and a number that seemed settled starts moving again.
The peg is one of the most technical parts of a deal and one of the most negotiated. Here is what it is, how it is usually set, and how to avoid losing money on it whichever side of the table you are on.
What net working capital means in a deal
In accounting, working capital is current assets minus current liabilities. In a deal, it is usually narrower. Cash, debt and tax items are typically excluded, because they are handled separately in the purchase price. What remains is the operating working capital the business needs to run day to day: accounts receivable, inventory and prepaid expenses, less accounts payable and accrued expenses.
The idea is simple. A buyer is paying for a business that can operate normally the day after closing. That requires a normal level of receivables, stock and payables. If the seller collects every receivable and stops paying vendors right before closing, the buyer inherits a business that needs a cash injection.
What the peg is
The peg, also called the target, is the agreed normal level of net working capital. At closing, actual working capital is estimated and compared to the peg. After closing, usually within 60 to 120 days, the final number is calculated and the price is adjusted.
- If working capital at closing is above the peg, the buyer pays the seller the difference.
- If it is below the peg, the seller pays the buyer, often out of an escrow.
This is not a rare clause. The SRS Acquiom 2026 Working Capital Purchase Price Adjustment Study, covering more than 1,570 private target deals, found that purchase price adjustments appear in more than 90% of private target deals today, up from about 50% a decade ago.
How the peg is usually calculated
The most common starting point is the average monthly net working capital over the trailing twelve months. Twelve months smooths out seasonality, which is critical for businesses like ecommerce brands that build inventory before the holidays.
From there, both sides argue adjustments:
- Removing one time items, such as an unusual prepayment or a large disputed payable.
- Normalizing for growth, since a fast growing company may need more working capital than its trailing average.
- Adjusting for inventory reserves, bad debt allowances and accruals that were never booked.
- Agreeing on consistent accounting policies between the peg period and the closing date.
That last point is where many disputes come from. If the peg was built on cash basis books and the closing balance sheet is prepared on an accrual basis, the comparison is apples to oranges.
A simple illustration
Illustrative example, not a specific client. Suppose a buyer and seller agree on a $10 million price for a distribution company, with a peg of $1.2 million based on the trailing twelve month average.
| Scenario | Closing NWC | Difference vs peg | Price effect |
|---|---|---|---|
| Normal close | $1,200,000 | $0 | No change |
| Seller ran down inventory | $950,000 | $250,000 below | Seller pays buyer $250,000 |
| Strong collections lag | $1,350,000 | $150,000 above | Buyer pays seller $150,000 |
A quarter of a million dollars on a $10 million deal is 2.5% of the price. That is real money, and it is decided by accounting details most owners never think about.
How often the true up actually moves money
Very often. In the same SRS Acquiom study, 89% of purchase price adjustments resulted in an adjustment being paid, 57% of deals saw an initial buyer favorable claim, and roughly 29% of deals involved a dispute over the buyer’s initial calculation. In other words, assume the peg will matter.
Tips for buyers
- Get the peg analysis done as part of your diligence, not after the LOI is signed and terms are locked.
- Insist on a clear definition and a sample calculation attached to the purchase agreement.
- Check that receivables are collectible and inventory is sellable, not just that the balances exist.
- Watch for seasonality and growth that make a simple average misleading.
Our buy side QoE work includes a working capital analysis and a supportable peg proposal, so you negotiate from data rather than the seller’s spreadsheet.
Tips for sellers
- Understand your monthly working capital pattern before you go to market.
- Book accruals, reserves and inventory adjustments consistently every month, so there are no surprises in the peg period.
- Do not try to manage working capital down right before closing. It will come back to you in the true up.
A sell side QoE and valuation lets you set the peg narrative early, and clean monthly bookkeeping is what makes that narrative believable.
Frequently asked questions
What is a net working capital peg?
It is the agreed normal level of operating working capital a business should deliver at closing. The final purchase price is adjusted up or down based on how actual working capital compares to the peg.
How is the working capital peg calculated?
It usually starts with the average monthly net working capital over the trailing twelve months, then gets adjusted for one time items, growth, seasonality and consistent accounting policies.
Is cash included in net working capital for the peg?
Usually not. Most deals are done on a cash free, debt free basis, so cash and debt are handled separately and excluded from the working capital calculation.
When is the final working capital adjustment made?
An estimate is used at closing, and a final calculation is typically prepared within about 60 to 120 days after closing, as set out in the purchase agreement.
Let’s talk about your numbers
If you are buying or selling a business and want a clear read on working capital before it turns into a negotiation, we are happy to help. Book a free, no pressure meeting through our buy side QoE page or contact our Miami team.
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