Offers & due diligence
How does working capital affect the final purchase price?
How the working capital peg works, a worked example of the adjustment, and how to keep it from quietly cutting your price.
By Michael D. Rubin, CEO & Founder · September 2026 · 823 words
Most business sales set a working capital target, called the peg, and the final price goes up dollar for dollar if the company delivers more working capital than the peg at closing, and down dollar for dollar if it delivers less. The peg is negotiated, so it can move your proceeds by a meaningful amount even after the headline price is agreed.
Working capital is the short-term money a business needs to operate: what customers owe you and the inventory on hand, minus what you owe suppliers and other short-term bills. Buyers expect a normal level of it to come with the company, so they can pay staff and suppliers from the first day.
Why buyers insist on a working capital adjustment
A price is quoted for a company that works. If a seller collected every receivable, stopped buying inventory and delayed paying suppliers in the final month, the cash would go to the seller and the buyer would have to put new money in on day one just to keep operating. The working capital adjustment prevents that.
It protects the seller too. If you build up extra inventory or receivables before closing because the business is growing, you are paid for them rather than handing them over for free. Understood properly, it is a fairness mechanism. Misunderstood, it becomes a quiet price cut.
How the peg is set
The peg is usually based on the company's average working capital over a recent period, often the trailing twelve months, so seasonal highs and lows even out. The definition matters as much as the number. The purchase agreement lists which balance sheet accounts count.
On a cash-free, debt-free deal, cash and debt are normally excluded. Items that are often debated include customer deposits, deferred revenue, accrued bonuses and vacation, and reserves for slow-moving inventory or doubtful receivables. Each one moved in or out of the definition changes the math, which is why it is worth settling early and in writing.
Seasonal companies need extra care. A landscaping or HVAC company may carry far more receivables in its busy season than in winter. If the peg is a twelve-month average but closing falls in a slow month, working capital will naturally come in low and the price will drop through no fault of the seller. Either the closing date or the peg should account for the season.
A worked example
Actual working capital at closing is $150,000 below the peg, so the price falls by $150,000. On a $10 million deal that is 1.5% of the price, caused by a slow month of collections. Had customers paid faster, or had the peg been set on a fairer average, the result could have been zero or even a small increase.
| Item | Peg (twelve-month average) | Actual at closing |
|---|---|---|
| Accounts receivable | $1,400,000 | $1,250,000 |
| Inventory | $600,000 | $620,000 |
| Accounts payable | ($550,000) | ($560,000) |
| Accrued expenses | ($150,000) | ($160,000) |
| Net working capital | $1,300,000 | $1,150,000 |
Estimated at closing, trued up later
Because final numbers are not known on closing day, the price is adjusted at closing using an estimate and then trued up once the books are closed, usually within a few months. Either side can dispute the calculation, and the purchase agreement sets out how disputes are resolved, often by an independent accountant. Some deals hold a separate adjustment escrow to cover the true-up so that neither side has to chase the other for payment.
For owners, this means the closing wire is not quite the last word on price. Keep the company's bookkeeping accurate right through closing, and have your CPA check the buyer's true-up calculation rather than accepting it as presented.
How to protect yourself
- Know your numbers early. Understand your average working capital, its seasonal swings and what drives them before you go to market.
- Settle the peg, or at least the method, in the letter of intent. Leaving it to the purchase agreement gives the buyer leverage once you have granted exclusivity.
- Watch for a peak-based peg. A target set on your busiest months, or during a growth spurt, takes money from you at closing.
- Agree the account definitions. Know which items count, especially customer deposits in home services and inventory reserves in distribution and manufacturing.
- Run the business normally. Rushing collections or holding back purchases before closing does not help; the adjustment takes it back.
Where MDR & Associates fits
We address working capital long before it reaches the purchase agreement. When letters of intent arrive, we compare how each buyer proposes to set the peg, because a better-looking price can be offset by an aggressive target, and we present every offer to you in person with that difference spelled out. We work alongside your CPA on the calculations and your transaction attorney on the definitions. The article on comparing offers shows how the peg fits alongside the other terms. For a starting estimate of what your company is worth before these adjustments, request a free valuation snapshot.
Where this fitsHow a business sale works, step by step →