The Net Working Capital Peg in M&A, Explained

You've agreed a price. Then the lawyers and accountants start talking about a "working capital peg," and suddenly the number you pay at close can move by tens of thousands of dollars. The net working capital peg is one of the least-understood deal terms among first-time acquirers, and it quietly adjusts the purchase price in ways that surprise people at the closing table. This guide explains what it is, how it's set, and where the fights happen. It builds on the M&A due diligence checklist and the working-capital line in financial diligence.

Quick answer: Most deals assume the seller leaves a normal amount of net working capital (current assets like receivables and inventory, minus current liabilities like payables) in the business at close — enough to keep operating without an immediate cash injection. The agreed normal level is the peg (or target). At close, actual working capital is compared to the peg, and the price is trued up dollar-for-dollar: deliver more than the peg and the seller gets paid the difference; less, and the price drops.

Why a peg exists at all

A business needs a baseline of working capital to function — cash to cover the gap between paying suppliers and collecting from customers. If a seller could strip out receivables and run down inventory right before close, you'd buy a business that needs cash on day one. The peg prevents that: it locks in a "normal" level of working capital as part of what you're buying, so neither side games the timing.

Think of it like buying a car with an agreed half-tank of fuel. Hand it over near-empty and you're owed a credit; hand it over full and you owe a bit more.

How the peg is set

The peg is usually based on the business's historical average net working capital — commonly a trailing 12-month average to smooth out seasonality. The mechanics:

• ✓Define the components — which accounts count as working capital. Cash is often excluded (deals are frequently "cash-free, debt-free"), and the exact line items are negotiated.
• ✓Normalize — strip out one-time or non-operating items, just as you would for earnings.
• ✓Average over time — typically 12 months, so a seasonal business isn't pegged at an artificial high or low point.

For a seasonal business, timing of close relative to the cycle matters enormously, which is why the trailing-average approach is standard.

The true-up at close

Two steps:

1. ✓Estimate at close — the parties estimate closing working capital and make a preliminary adjustment to the price.
2. ✓Final true-up — usually 60-90 days later, actual closing working capital is calculated from the closing balance sheet and a final adjustment settles the difference.

If actual exceeds the peg, the buyer pays the seller the surplus (you received more than the "normal" amount). If actual is below the peg, the seller refunds the shortfall (you'd otherwise have to inject that cash yourself).

Where the disputes come from

This is where deals get tense after the handshake:

• ✓What counts as working capital — disagreements over whether specific accruals, prepaids, or reserves belong in the calculation.
• ✓Accounts receivable quality — should slow or uncollectible receivables count at full value? Buyers push for reserves; sellers resist.
• ✓Inventory valuation — obsolete or slow-moving stock counted at full cost inflates working capital delivered.
• ✓The averaging window — a seller may prefer a window that flatters the peg.

Tight, explicit definitions in the purchase agreement — line by line — are the best protection. Vague working-capital language is one of the most common sources of post-close conflict.

What buyers should do

• ✓Diligence the components, not just the total — understand receivable aging and inventory quality, because those drive the real number.
• ✓Negotiate the definition in the agreement precisely, including which accounts are in and how each is valued.
• ✓Model the seasonality so you know where in the cycle you're closing and what the true-up is likely to look like.
• ✓Read the closing mechanics — who prepares the closing statement, the dispute-resolution process, and the true-up deadline.

Most of this lives in the documents — the historical balance sheets, AR aging, inventory reports, and the draft purchase agreement. Reading and reconciling them is the slow part that Deal OS helps compress, returning source-cited findings from the deal workspace. It supports your analysis; it doesn't replace your accountant or deal counsel.

Frequently asked questions

What is a working capital peg in an acquisition? It's the agreed "normal" level of net working capital the seller must leave in the business at close, usually based on a trailing-12-month historical average. Actual working capital at close is compared to the peg, and the purchase price is adjusted dollar-for-dollar for any difference.

How is the net working capital target calculated? Typically as a trailing-12-month average of net working capital (current operating assets minus current operating liabilities), normalized for one-time items, with cash often excluded. The 12-month window smooths out seasonality so the target isn't set at an artificial high or low point.

What happens if working capital is below the peg at close? The seller effectively refunds the shortfall, lowering the price, because you'd otherwise have to inject that cash to operate. If working capital is above the peg, the buyer pays the seller the surplus. The adjustment is usually finalized in a true-up 60-90 days after close.

Why is the working capital peg important? It stops a seller from stripping cash, receivables, or inventory out of the business right before close, which would leave you needing an immediate cash injection. It also quietly moves the final price, so a vague or poorly-defined peg is a common source of post-close disputes.

Don't get surprised at the closing table

If you're working through a deal and want the working-capital history and the agreement terms pressure-tested, book a 15-minute walkthrough of how Deal OS turns a workspace of documents into cited diligence findings.