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Working capital peg.

Aka. Working capital target · Net working capital target · The peg
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What is a working capital peg?

A working capital peg — also called the working capital target — is the agreed normal level of net working capital that a target is expected to deliver to the buyer at closing. It is set during negotiation and written into the purchase agreement, and it serves as the benchmark against which the actual working capital at close is compared.

The logic is simple. A business needs a certain amount of working capital — receivables, inventory, payables — to keep running. If the seller delivers less than that normal level at close, the buyer would have to inject cash on day one and is effectively short-changed; if the seller delivers more, the seller has left value on the table. The peg fixes that normal level so neither side games the timing.

The difference between the peg and the actual working capital at close drives a dollar-for-dollar adjustment to the purchase price. This is why the peg is one of the most negotiated numbers in any deal that uses a closing balance sheet.

How the working capital peg works

The peg sits at the center of the closing adjustment mechanism.

  1. Set the peg. The parties agree a normal working capital level, usually based on a trailing average of monthly working capital — often the prior twelve months — to smooth out seasonality.
  2. Estimate at close. An estimated closing balance sheet is prepared just before close, and the purchase price is adjusted up or down for the estimated difference from the peg.
  3. True up after close. Once the actual closing balance sheet is finalized, a final adjustment reconciles the estimate to the real number.
  4. Adjust dollar for dollar. Working capital above the peg increases the price; working capital below the peg reduces it.

Frequently asked.

4 questions
01 How is the working capital peg calculated?

It is typically derived from a trailing average of the target's monthly net working capital — often over the twelve months before close — to capture a normal operating level and smooth out seasonal swings. The exact components and the averaging period are negotiated and defined in the purchase agreement.

For seasonal businesses, a simple average can mislead, so the parties sometimes agree a peg that varies by month or use a more tailored basis.

02 What happens if actual working capital is below the peg?

The purchase price is reduced, usually dollar for dollar, by the shortfall. The buyer is compensated for the working capital the business is missing at close, because it will have to fund that gap itself.

If actual working capital is above the peg, the price increases by the excess, compensating the seller for the extra working capital left in the business.

03 Why is the working capital peg so heavily negotiated?

Because it moves the price directly and is genuinely ambiguous. There is no single correct normal level — it depends on which months you average, how you treat seasonality, and which accounts count as working capital. Each of those choices shifts the peg, and every dollar of shift is a dollar of price.

04 What's the difference between the peg and net working capital?

Net working capital is the actual figure on the balance sheet — current assets minus current liabilities, on whatever definition the parties agree. The peg is the agreed target for that figure at close. The adjustment is the gap between the two.

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