I have heard horror stories about buyers using the working capital peg at closing to claw back hundreds of thousands of dollars from the purchase price. How do we track and normalize our net working capital over our exit runway to prevent closing table surprises?

Question

Tyler Smith · Accepted Answer

The net working capital peg is one of the most common ways sellers inadvertently forfeit cash at the closing table. During negotiations, the buyer agrees on an enterprise valuation, but that valuation assumes the business will be delivered with a normal level of working capital required to operate on day one without cash infusions.

If your actual net working capital at closing falls below the agreed-upon target peg, the buyer docks the purchase price dollar-for-dollar. To protect your proceeds, you must actively manage this metric over your multi-year exit runway:

- Understand the components: Net working capital is current assets (excluding cash) minus current liabilities (excluding funded interest-bearing debt). This includes accounts receivable, inventory, prepaid expenses, accounts payable, and accrued liabilities.
- Calculate your trailing twelve-month average: Buyers typically propose a peg based on the average working capital of your business over the previous twelve months. If your business experiences seasonal spikes or irregular collection cycles, a simplistic average can severely disadvantage you. Track this monthly on your financial Scorecard.
- Tighten credit and collections: Implement strict accounts receivable management. Outstanding receivables that exceed ninety days are often written off by buyers during diligence, reducing your working capital calculation. Enforce clear payment terms to keep collections tight and predictable.
- Normalize payables: Resist the urge to stretch vendor payables to artificially hoard cash before a sale. Diligence accountants will normalize these payables right back into your liabilities, driving up the required working capital peg.

By stabilizing your working capital baseline two years before going to market, you eliminate volatile swings. You enter purchase agreement negotiations with clear historical data, defend a fair peg, and ensure you keep every dollar promised in your purchase price.