How much working capital must remain in the company at closing?

By Michael D. Rubin, CEO & Founder · September 2026 · 804 words

There is no fixed dollar amount: buyer and seller agree on a normal level of working capital for your company, called the peg, usually based on its own recent monthly average, and the price is adjusted up or down depending on whether the actual amount at closing is above or below that target. You leave behind what the business needs to operate, not a dollar more or less.

Working capital here usually means accounts receivable plus inventory plus prepaid expenses, minus accounts payable and accrued expenses. Cash and debt are usually handled separately, which is why the definition matters as much as the number.

Why buyers expect working capital to stay behind

A buyer pays for a running business. The price, usually based on a multiple of adjusted EBITDA (operating profit after owner-specific expenses are added back), assumes the company arrives with the receivables and inventory it normally carries. Those are what fund payroll and materials until customers pay.

If a seller collected every receivable, sold down inventory and left unpaid bills behind, the buyer would have to inject cash on day one just to keep going. The peg prevents that. It also protects you: if you leave more than normal, the price goes up.

How the peg is usually set

• Look back over a period, often the trailing twelve months, using month-end balance sheets rather than a single date.
• Adjust for seasonality. A roofing or HVAC company carries very different receivables in July than in January, so an average across the year is fairer than a peak month.
• Remove one-time items, such as a large prepayment or an unusual bill that will not recur.
• Agree which accounts are in and out. Cash, bank debt, owner loans and income tax balances are usually excluded; the business is typically sold cash-free and debt-free, meaning you keep the cash and pay off debt.
• Write the definitions down, with a sample calculation attached to the purchase agreement.

A worked example

Suppose the peg is agreed at $1.2 million. At closing, an estimate is prepared. If actual working capital is $1.05 million, the price falls by $150,000. If it is $1.3 million, the price rises by $100,000, provided the agreement adjusts in both directions, which you should insist on. The figures are illustrative.

Because nobody knows the exact numbers on closing day, the estimate is usually trued up a few months later, once receivables have been collected and invoices have arrived. Any difference is paid by one side to the other. Agree in advance who prepares the final calculation and how disagreements are settled.

Some buyers propose a range, sometimes called a collar, within which no adjustment is made at all. A narrow collar avoids arguments over trivial amounts; a wide one can quietly cost you if working capital runs high on closing day. The closing date matters too. Closing right after a heavy billing month, before customers have paid, leaves a high receivables balance that raises the price; closing after a big collection month does the opposite. Your advisor and CPA can help you choose the date with this in mind.

Where sellers lose money on working capital

• Leaving the peg to be settled after the letter of intent, when you no longer have competing buyers. Ask for the method, and ideally a number, in the LOI itself.
• Accepting a peg based on the busiest month of the year.
• Discovering that old, slow-moving inventory is written down in diligence, which is common in distribution and wholesale and manufacturing companies.
• Customer deposits or prepaid service agreements being treated as debt, reducing your proceeds.
• Accrued vacation, bonuses or warranty obligations appearing at the last minute.
• A one-way adjustment that lowers the price for a shortfall but pays nothing for a surplus.

How to prepare before you go to market

Produce accurate monthly balance sheets, not only year-end ones. Collect or write off old receivables. Count and value inventory honestly. Know your seasonal pattern and be able to explain it. These steps make the peg a short conversation instead of a late surprise, and they are part of preparing your business for sale. If you have a year or two before selling, pre-exit consulting can put this in order early.

How MDR & Associates handles the peg

We address working capital while offers are being compared, because two letters of intent with the same price can leave you with very different proceeds once the peg is applied. The financial recast we prepare for marketing already shows buyers a normalized picture of the business, which makes the peg easier to defend. We review every offer with you in person, alongside your CPA and attorney; our guide on how to compare offers shows the full method.

To see where your company stands before any of this matters, request a free valuation snapshot.

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