A working capital peg is the agreed target for operating working capital that a seller delivers at closing. If the actual amount is lower or higher, the purchase price may be adjusted under the purchase agreement. For an owner, the important question is not simply whether the peg looks reasonable. It is whether the definition, calculation method, and timing reflect how the business actually operates.

This matters especially for industrial and business-services companies with seasonal inventory, uneven project billing, customer deposits, or changing payment terms. A useful pre-sale exercise is to reconstruct monthly working capital, identify unusual movements, and test how different closing dates affect the calculation.

What Does the Peg Measure?

In a sale agreement, net working capital usually refers to specified operating current assets less specified operating current liabilities. Receivables, inventory, and payables are common components. Cash, debt, and transaction expenses may be treated separately, but the agreement must define the treatment. The balance sheet label alone is not enough to decide what belongs in the calculation.

The peg represents the level of working capital assumed in the negotiated price. The closing calculation compares delivered working capital with that target. A shortfall can reduce proceeds; an excess can increase them, depending on the contract. The mechanics should be evaluated alongside debt, cash, expenses, and any other purchase-price adjustments so an item is not counted twice.

A Simple Illustration

Under a straightforward dollar-for-dollar adjustment, that difference would reduce the price by $0.2 million. The actual agreement may have different rules, exclusions, estimates, and dispute procedures. The table is useful precisely because it forces a question: which accounts and policies produced the $1.8 million?

The following numbers are entirely hypothetical and illustrate only the arithmetic. They are not a recommended peg or a forecast of transaction proceeds.

Five Checks Before Agreeing to a Target

1. Build a monthly bridge. Reconcile receivables, inventory, payables, and other proposed accounts to monthly balance sheets and the general ledger. Show the effect of each item rather than relying only on an annual average.
2. Test seasonality and growth. Compare the proposed measurement period with the likely closing month. A historical average can obscure a seasonal inventory build or a growing sales base that requires more receivables.
3. Separate recurring from unusual. Identify one-time receivables, obsolete inventory, unusual accruals, and changes in collection or payment practices. Document why an adjustment is proposed and apply the same treatment to both the historical peg and closing calculation.
4. Map every excluded item. Customer deposits, deferred revenue, sales taxes, accrued bonuses, and owner-related balances can create disagreements. Ask where each item appears in the working-capital definition, debt calculation, or transaction-expense schedule.
5. Agree on calculation rules. A sample schedule should specify included accounts, accounting policies, estimation methods, and the order of precedence between historical practice and other standards. Counsel and financial advisers should review the agreement language.

Questions to Resolve in the Letter of Intent

The letter of intent may not settle every accounting detail, but an owner can surface the major assumptions early. What period will establish the peg? How will a seasonal closing date be handled? Which balance-sheet accounts are included? Who prepares the closing statement, when can the seller review it, and how are disagreements resolved? The definitive agreement should answer these questions precisely.

A working capital analysis also belongs in broader sale preparation, alongside the transaction timeline and the distinction between enterprise value and actual proceeds discussed in our valuation guide. Preparing a documented monthly schedule before negotiations gives the parties a concrete basis for discussion. It does not guarantee a particular peg or final price.

The Practical Takeaway

Treat the peg as a negotiated definition and process, not a single number. A seller who can explain the monthly pattern, the included accounts, and the effect of the closing month is better prepared to assess a proposed adjustment. The right outcome depends on the company, the buyer, and the actual transaction documents; obtain transaction-specific accounting and legal advice.