The working capital peg: the footnote that moves millions at closing
In a typical acquisition, the purchase price in the LOI is not the number that lands in your account. Between the LOI and closing, a calculation happens called the working capital true-up. Most founders do not think carefully about it until they are already in a process, which is precisely when their leverage to negotiate it is lowest.
What the peg is and why it exists
The concept is straightforward: the buyer is purchasing the business as a going concern and expects to receive it with a normal, sustainable level of working capital already in place. Working capital is current assets minus current liabilities, typically accounts receivable, inventory, and prepaid expenses on one side, and accounts payable and accrued liabilities on the other.
The peg is the agreed-upon number that defines what "normal" working capital looks like for this particular business. If the working capital at closing is below the peg, the seller writes a check for the difference. If it is above, the seller keeps the excess.
The logic is sensible. Without a peg, a seller could strip cash out of the business between signing and closing, leaving the buyer with a hollowed-out company and no recourse.
Where founders lose ground they did not know they were defending
The peg itself is negotiated as part of the purchase agreement, and this is where the information asymmetry shows up.
Buyers negotiate working capital pegs for a living. Most have done it dozens of times. Most founders have done it once, if at all. That asymmetry is not an accident. It is leverage, and it shows up in how the peg is set.
The cash question most founders miss
The working capital peg also interacts with how cash is treated at closing. In most deals, sellers expect to keep the cash in the business. Whether that is actually the case depends on how the peg is defined and how cash is classified in the purchase agreement.
Founders who have never reviewed that language with M&A counsel are sometimes surprised to learn that cash they expected to take out of the business was included in the working capital delivered to the buyer. The language that governs this was negotiated months before closing, in a part of the agreement that did not get the same scrutiny as the headline price.
The size of the exposure
This is not a minor footnote. On a deal of any size, the working capital adjustment can run from several hundred thousand dollars to several million. It moves at closing, often without much ceremony, because the language that determined it was agreed to months earlier when both sides were still building goodwill.
Five questions to settle before the LOI
The time to understand the working capital peg is during LOI negotiation, not during the closing call.
- How is working capital defined in this agreement? Get the specific line items included, not just the headline formula.
- Is cash included or excluded? Make this explicit in the LOI, not left to interpretation in the definitive agreement.
- What is the proposed peg methodology? Trailing 12-month average, LTM median, or a negotiated fixed number. Each produces a different result for a seasonal business.
- What is the measurement date? The peg is measured at a specific point close to closing. Know how your working capital typically looks at that time of year.
- What is the dispute resolution mechanism? If the buyer and seller disagree on the closing adjustment, who decides and how long does that process take?
None of this requires a deep finance background. It requires knowing the questions before the buyer's legal team sets the structure for you.