Working Capital Peg Explained
The working capital peg is one of the most common sources of post-closing disputes — and one of the easiest to get right if both parties understand the mechanics early.
The basic mechanism
At signing, buyer and seller agree on a target net working capital (NWC) level the business needs to operate normally. At closing, actual NWC is measured. If delivered NWC is below the peg, the price adjusts down; above it, the price adjusts up. The peg keeps the buyer from paying twice — once for the business, once to refill its working capital.
Setting the peg
- Average method: trailing twelve-month average NWC, adjusted for known changes.
- Seasonality: businesses with seasonal swings need a peg matched to the closing month, not an annual average.
- Definition discipline: the purchase agreement must define every component — which receivables count, how payables accrue, what happens to debt-like items.
Where deals go wrong
Most peg fights trace back to ambiguity: undefined accounting policies, inconsistent treatment of one-time items, or a peg built on unrepresentative months. A clean databook with monthly NWC schedules removes the guesswork — both sides see the same history.
How we support it
Our databooks include dedicated NWC and Net Debt schedules with monthly granularity, so the peg can be negotiated from evidence rather than estimates. See M&A Databooks.