Guide · Updated
The Net Working Capital Peg: The Line That Costs You at Close
Most searchers obsess over the price and the DSCR and then get surprised, sixty days after close, by a working capital true-up that quietly costs them a chunk of their equity. The net working capital peg is the least glamorous line in the purchase agreement and one of the most expensive to get wrong.
What the peg actually is
A business cannot run on zero cash. It needs receivables it has not yet collected, inventory on the shelf and payables it has not yet settled. The net of those is net working capital, and the peg is the normal level the seller agrees to leave behind so you are not forced to inject cash on day one just to make payroll. In the sample deal, trailing net working capital runs about 598,667, which is roughly 7.7% of revenue, a typical range for a business like this.
Why it swings real money
The peg is trued up after close. If the seller delivers working capital below the peg, you pay the difference in cash. Above it, they get a credit. At a deal this size the swing is easily six figures, and it comes straight off the equity you worked to raise. It is not part of the headline price, so it is easy to leave unmodeled until it is too late to negotiate.
How sellers game it, and how to catch them
A seller who knows the close date can quietly reshape the balance sheet in the final weeks:
- Accelerate collections, pulling receivables into cash they keep.
- Delay paying vendors, inflating payables so net working capital looks lower and the peg is set low.
- Run down inventory, so you inherit empty shelves you have to restock.
The defense is to look at working capital month by month, not as a single year-end snapshot. A monthly series from the balance sheet (Schedule L on the tax return, plus interim statements) shows the seasonality and exposes any late-stage manipulation. That is exactly what a proper working capital schedule in the model is for.
Set it before you sign
The peg is negotiated in the purchase agreement, so the time to get it right is before signing, not during the true-up fight afterward. Build the monthly net working capital from the financials, agree a defensible average, and write the method into the agreement. If you want the underlying reconciliation that feeds this, start with the CIM-to-tax-return check and the working capital peg definition in the glossary.
Frequently asked questions
What is a net working capital peg?
The peg is the normal level of working capital (receivables plus inventory minus payables and other current liabilities) that the seller must leave in the business at close. It is usually set as an average of the trailing months so a normal amount of operating cash is delivered with the business.
Why does the working capital peg matter to the buyer?
If the seller delivers less working capital than the peg, you pay the shortfall after close, out of your own pocket, to keep the business running. If they deliver more, they get a credit. A peg set wrong, or gamed, can swing six figures at a deal this size.
How is the peg usually calculated?
Most purchase agreements use a trailing average, often twelve months, of monthly net working capital, which smooths out seasonality. The exact window and what counts as a current asset or liability are negotiated and are where disputes happen.
How do sellers game the peg?
By accelerating collections, delaying payments or running down inventory just before close, a seller can hand over a business that technically hits the peg but is starved of operating cash on day one. A monthly, not just annual, view of working capital exposes this.
When is the working capital trued up?
Usually sixty to ninety days after closing, once the actual closing balance sheet is finalized. The difference between the delivered working capital and the peg is settled in cash then, which is why getting the peg right before signing matters.