Methodology · Private Equity · Purchase Price Adjustment | Aug 4, 2026 | 7 min read
It is day thirty-eight. The quality of earnings came back clean enough, the multiple held, and the partnership has approved. Two associates are already staffed on the next deal.
Somewhere in a redline of the purchase agreement, two law firms are negotiating a number that will move more cash at close than the last three points of EBITDA you argued about.
Nobody on the deal team is in that thread.
Why the peg escapes scrutiny
The working capital peg is the normalized level of net working capital you expect to be delivered at close. Deliver above it and you pay the seller the excess. Deliver below it and the price comes down. It is a dollar-for-dollar adjustment, settled in cash, usually within ninety days of closing.
That last part is why it gets ignored.
An EBITDA add-back carries a multiple. At 8x, half a million dollars of unsupported add-back is four million dollars of purchase price, and everyone in the room understands the leverage. The peg carries no multiple. A dollar is a dollar. Set against an eight-times number, each peg dollar simply feels smaller.
It is also negotiated at a different time, by different people. The EBITDA argument happens during diligence, with the deal team present and the model open. The peg is settled in the final weeks, in the purchase agreement, by counsel — after the deal team has formed its view on price and frequently after it has moved on.
The number that moves the most cash is the one with the least diligence attached. That is a sequencing failure, not a competence failure, and it is the same sequencing failure that produces unexamined add-backs.
The averaging window is the lever
A peg is almost always built as an average of trailing monthly working capital balances. Twelve months is conventional. Conventional is not the same as correct.
Averaging assumes the business needs roughly the same working capital in every month. For a business with any seasonality — and most lower-middle-market businesses have some — that assumption is false in a specific and expensive direction.
Consider a distributor that builds inventory ahead of an autumn selling season. Its working capital requirement peaks in August and troughs in February. A twelve-month average sits between the two. If the deal closes in July, the buyer takes delivery of a business at the top of its working capital cycle, holding far more inventory and receivables than the peg assumes — and pays the seller the difference in cash.
Close in March instead and the reverse happens: the buyer receives a price reduction, then has to fund the seasonal build out of its own pocket four months later.
Neither outcome is fraud. Both are the mechanical consequence of averaging a cycle. The seller’s advisor chose the window, and the window decides who funds the cycle.
Three definitions of the same number
Here is the part that produces genuine disputes rather than merely expensive ones. “Working capital” is not one number in a deal. It is at least three, and they are authored by different people at different times for different purposes.
“A normalized average, presented as what the business requires to operate.”
Authored by the sell-side advisor. Illustrative, and not the number that governs anything.
“Your own assumption about the working capital the business will consume.”
Authored by your associate, built independently, and rarely reconciled back to the CIM.
“The peg — the only one of the three that moves cash.”
Authored by counsel, in the final weeks, from a definition negotiated line by line.
The third is the one that counts, and it is the one the deal team is least likely to have read closely.
The disagreement usually lives in the exclusions. A cash-free, debt-free deal excludes cash and debt from working capital — straightforward until you ask what else behaves like debt. Deferred revenue is the classic: money already collected for work not yet done. Is it a working capital liability, or is it debt-like and therefore a purchase price deduction? Both readings are defensible. They are worth very different amounts.
The same argument runs through accrued bonuses, customer deposits, warranty reserves, and unbilled receivables. Each one is a small definitional choice. Together they are frequently larger than the last EBITDA adjustment anyone fought over.
What the arithmetic actually costs
Put a number on it. 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, because the lender sized off EBITDA and has no view on your working capital assumptions.
It does not show up as a price increase. It shows up four months later as an unexpected revolver draw, and it gets explained internally as a working capital swing rather than as a term you agreed to.
Then run it across a buy-and-build. Six add-ons in eighteen months, each with its own peg, each negotiated by counsel against a different seller’s definition of debt-like items. None of the six is individually large enough to warrant a partner’s attention on the appendix. The aggregate is a permanent, uncompensated draw on the platform’s cash.
Math does not change based on which document a number was buried in.
How to test the peg before you sign
The peg is unusual among diligence items in that it is fully testable from information you already hold. It requires no new data 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, not 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 — deferred revenue, accrued bonuses, deposits — is a negotiation you have not had yet.
- Read the true-up mechanics. Who prepares the closing statement, on what timetable, and who arbitrates a dispute? A peg with a favourable number and an unfavourable dispute process is not a favourable peg.
None of this requires a second quality of earnings engagement. It requires the same discipline applied to the appendix that you already apply to the bridge.
Where verification belongs
The recurring pattern across both of these adjustments is not that deal teams lack rigor. It is that verification is sequenced after commitment. The bridge is examined after the multiple is indicated; the peg is examined after the price is agreed, if at all.
Deterministic verification moves that work forward. When the same working capital figure has to reconcile across the CIM, the model, the management presentation and the draft agreement, a machine can check all four in the time it takes to open them — and a mismatch between documents is a finding regardless of which document is right.
That is the Clarity Framework™ applied to the appendix rather than the headline: not a summary of the data room, but a cross-examination of it, with every figure anchored to a source in the Provenance Ledger.
A number can be assembled honestly by a sell-side advisor, agreed in good faith by two law firms, and still be structurally wrong for your returns.
The bridge is where the deal is priced. The peg is where it is repriced. Read both.
Related reading: The EBITDA Illusion · Working Capital Peg — full definition · AI Quality of Earnings