Working Capital Peg: What Buyers Miss

What a working capital peg is and why it exists

A working capital peg is a provision in a business purchase agreement that sets a target amount of working capital the seller must deliver at closing. Working capital is defined as current assets (cash, accounts receivable, inventory, prepaid expenses) minus current liabilities (accounts payable, accrued expenses, short-term debt). The peg defines how much of that cushion the seller owes you.

The purpose: when you buy an operating business, you need a minimum level of working capital to pay vendors, make payroll, and cover operating costs in the weeks between close and your first full operating cycle. Without a working capital peg, a seller can legally drain the business's cash, delay receivables, and accelerate payables in the weeks before closing - leaving you with a business that cannot meet its day-one obligations.

Working capital pegs are standard in deals over $1M. They are less common in sub-$500K deals, where buyers often just accept the business "as is" and plan for a personal cash infusion to cover early operating costs.

How to calculate the target peg and negotiate it correctly

Step 1: Establish a baseline. Request 12–24 months of monthly balance sheets from the seller. Calculate working capital for each month. The target peg should be the average or median of those months - not the peak month (which inflates the requirement artificially) and not the trough (which understates what you actually need).

Step 2: Understand what is included. The definition of current assets and current liabilities in the purchase agreement controls what counts. Sellers often argue to exclude certain receivables (slow-paying customers, contested balances). Buyers should argue to include all receivable that are less than 90 days old. Specifics matter: if the definition is vague, post-close disputes are likely.

Step 3: Set the adjustment mechanics. Most peg provisions work as follows: the purchase price is set assuming the peg is delivered. If actual working capital at close is above the peg, the purchase price increases by the overage. If it is below the peg, the purchase price decreases by the shortfall. This is a dollar-for-dollar adjustment.

Step 4: Choose a measurement date. The peg is measured as of the closing date or the last business day before closing. A seller who knows the measurement date can game the number - accelerating receivables or delaying payables in the final week. Include anti-gaming provisions that look back at 30-day averages, or require the working capital to remain within a corridor of the target for 30 days before closing.

Common working capital mistakes in small business acquisitions

Mistake 1: Not requiring a peg at all. In sub-$500K deals, buyers frequently skip a working capital peg and rely on the seller's verbal assurance that "there will be cash in the business." That assurance is unenforceable. Even in small deals, include a minimum cash or working capital floor in the purchase agreement.

Mistake 2: Accepting a peg set at a low month. Sellers set the peg target based on the most favorable period for them. A seasonal business with a slow summer will show low working capital in June - that month should not anchor the peg for a deal closing in October.

Mistake 3: Not understanding how inventory is counted. Inventory counts as a current asset in working capital. If inventory is included in the purchase price but not properly valued at close, the peg and the purchase price can interact in unexpected ways. Specify whether inventory is counted at cost or fair market value and who conducts the physical count.

Mistake 4: Missing the cash flow timing problem. Even a properly set working capital peg can leave you short if your first large payroll or tax payment hits before your first full receivables cycle completes. Model the cash flow for your first 90 days of operation separately from the working capital peg - they solve different problems.

See also: SDE vs EBITDA: Which Valuation Metric to Use for how earnings figures affect what a peg should target, and the full Business Acquisition Closing Checklist for when the peg adjustment lands.

Frequently Asked Questions