// THE DEAL DESK
Working Capital Peg
The normalized level of net working capital a buyer expects to be delivered at close, usually set as an average of trailing monthly balances. Delivery above or below the peg adjusts the purchase price dollar-for-dollar.
The peg is the second-largest silent price adjustment in a lower-middle-market deal and the one least likely to be modelled by the deal team. Unlike EBITDA, it moves cash at close and it moves it without a multiple to make the error obvious.
EBITDA is negotiated in the open. The peg is negotiated in the appendix.
// HOW IT GETS GAMED
Six levers on a single number
Each is a legitimate mechanic. Each becomes a price transfer when nobody examines it.
- 01
The averaging window
A peg is almost always a trailing average of monthly balances, and twelve months is conventional. Averaging assumes the business needs the same working capital every month. For any seasonal business that is false in a specific direction, and the seller’s advisor chose the window.
- 02
Seasonality against the closing date
A distributor that builds inventory ahead of a selling season peaks in one month and troughs in another. Close at the peak and the buyer pays the seller the excess in cash. Close at the trough and the buyer takes a price reduction, then funds the build itself four months later.
- 03
Debt-like items
A cash-free, debt-free deal excludes cash and debt — straightforward until you ask what else behaves like debt. Deferred revenue, accrued bonuses, customer deposits, warranty reserves and unbilled receivables are each a defensible argument in either direction, and together they are often larger than the last EBITDA adjustment anyone contested.
- 04
Definitional drift across documents
Working capital appears in the CIM as a normalized illustration, in your model as an independent assumption, and in the purchase agreement as the number that actually moves cash. The three are authored by different people at different times and are rarely reconciled against each other.
- 05
Pre-close balance-sheet management
Deferred capex, an inventory rundown, or accelerated collections all change delivered working capital in the weeks before close. The true-up compensates the balance-sheet movement. It does not compensate the operational cost of restoring normal levels afterwards.
- 06
The true-up mechanics
Who prepares the closing statement, on what timetable, and who arbitrates a dispute. A favourable peg attached to an unfavourable dispute process is not a favourable peg.
// HOW TO TEST IT
Four tests, no new data request
The peg is unusual among diligence items: it is fully testable from information you already hold. It requires no new request — only the decision to look.
- Rebuild it on your own window.
- Do not accept the average in the draft agreement. Compute the peg across every window available and plot them. If the seller’s chosen window is the outlier, the peg is a selection rather than a measurement.
- Test against the trough, not the mean.
- Ask what working capital the business needs at its seasonal low point and at the projected closing date — not on average across a year it will not repeat.
- Reconcile the three definitions.
- Line up the CIM’s working capital, your model’s, and the agreement’s, item by item. Every line where they disagree is a negotiation you have not had yet.
- Read the true-up mechanics.
- Preparation, timetable and arbitration decide who wins a disagreement about a number neither side can fully predict at signing.
The full argument — the three competing definitions, the arithmetic on a $40M platform, and why this compounds across a buy-and-build — is in The Second Negotiation.
// QUESTIONS
Common questions
- What is a working capital peg?
- The peg is the normalized level of net working capital a buyer expects to be delivered at close, usually set as an average of trailing monthly balances. Delivery above the peg means the buyer pays the seller the excess; delivery below it reduces the purchase price. It is a dollar-for-dollar adjustment settled in cash, typically within ninety days of closing.
- Why does the working capital peg get less scrutiny than EBITDA?
- Because it carries no multiple. At 8x, a dollar of unsupported EBITDA add-back is eight dollars of purchase price, so everyone understands the leverage. A peg dollar is a dollar, which makes each one feel smaller. It is also negotiated at a different time by different people — settled in the purchase agreement by counsel in the final weeks, after the deal team has formed its view on price.
- How is a working capital peg manipulated?
- The averaging window is the primary lever: a twelve-month average smooths a seasonal business into a peg that does not reflect the working capital the company actually needs on the closing date. The second lever is definitional — what counts as a debt-like item, such as deferred revenue or accrued bonuses, is negotiated separately in the purchase agreement and frequently differs from the assumption in the buyer’s own model.
- How much can a mis-set peg cost?
- On a $40M enterprise value platform, a peg set $1.5M below the level the business genuinely needs is 3.75% of enterprise value, paid in cash at close out of equity rather than debt. It rarely appears as a price increase. It appears months later as an unexpected revolver draw, explained internally as a working capital swing rather than as a term that was agreed.
// VERIFY BEFORE YOU SIGN