Working Capital Peg Questions: 7 Honest Answers for Owners Mid-Deal

The working capital peg is the line item in a purchase agreement that most owners never model, and the one most likely to shrink the check at closing. It is quietly set, rarely explained, and almost always negotiable. These are the seven questions sellers ask most often once a Letter of Intent (LOI) is in hand, with straight answers.

What is a working capital peg in a Mergers and Acquisitions (M&A) deal?

A working capital peg is a target amount of Net Working Capital (NWC) the buyer expects your business to deliver at closing. NWC is defined for this purpose as current operating assets, mainly Accounts Receivable (AR), inventory, and prepaid expenses, minus current operating liabilities, mainly Accounts Payable (AP) and accrued expenses. Cash and debt are typically excluded. If delivered NWC falls below the peg, the shortfall usually reduces the purchase price dollar for dollar.

Why do buyers set a working capital target?

Buyers set a peg so they are not forced to inject working capital into the business right after they take over. The theory is that a business should be sold with enough operating liquidity to run normally, consistent with how it has historically run. Without a peg, a seller could in principle sweep AR, delay AP, and hand over a cash-starved company. The peg protects the buyer from that scenario and, when properly structured, is intended to be owner-neutral at closing.

What happens if I deliver below the working capital peg?

A delivery below the peg typically triggers a dollar-for-dollar deduction from the purchase price. If the peg is $5.0 million and delivered NWC is $4.6 million, the purchase price generally drops by $400,000. The adjustment usually runs through a true-up process in the 60 to 120 days after closing, during which the buyer prepares a final NWC calculation. If you deliver above the peg, most agreements credit the surplus back to you, though some caps apply.

Can the buyer change the peg between the Letter of Intent (LOI) and close?

Yes, and this is one of the most common surprises for sellers. If the LOI lists the peg as "to be determined at close" or references a method rather than a dollar figure, the buyer effectively sets the final number during due diligence. Even when the LOI names a figure, the buyer's Quality of Earnings (QoE) team may propose adjustments that reshape the base period. The strongest sellers negotiate the method and the dollar range inside the LOI, not after.

How is the peg calculated?

The default method is a Trailing Twelve Months (TTM) or Last Twelve Months (LTM) average of monthly NWC balances, often called the TTM or LTM peg. Variations include six-month averages, three-month averages, year-end point-in-time balances, and seasonality-adjusted composites. The choice of base period can move the peg by several hundred thousand dollars on a mid-market deal. The method is a negotiation, not an accounting given, and small changes in exclusions, such as customer deposits or deferred revenue, can shift the number meaningfully.

Can I negotiate the working capital peg?

Yes. The peg has four main negotiation levers: the base period used to compute it, the items included and excluded, the length of the post-close true-up window, and the dispute mechanism if the parties disagree on the final calculation. Independent accountant review is the standard dispute path and is seller-friendlier than arbitration or litigation. Owners who prepare their own NWC analysis before the LOI almost always negotiate better pegs than owners who respond to the buyer's first proposal.

How is working capital different from the purchase price?

The purchase price is the headline number in the LOI. Working capital is a separate mechanic that adjusts that headline up or down based on what you deliver at closing. Think of them as two layers: the price is what the buyer agrees the business is worth, and the peg determines whether you deliver the business in the operating condition that price assumed. A $20 million deal with a $500,000 NWC shortfall nets to $19.5 million, and the delta rarely shows up until the final funds flow.

If you are inside this question right now

Working capital pegs are easier to shape before the LOI is signed than to escape after. If you want to pressure-test whether the peg in front of you is fair, work through our 7-question working capital peg risk assessment, model the sensitivity in the working capital peg calculator, and read the full picture in the primary resource: The Working Capital Peg: What Owners Lose at the Closing Table. Exit planning is the ongoing practice that lets owners sit across from a buyer with their own number already in hand.