We keep hearing about the working capital peg from our M&A advisors, but it feels like a mechanism designed for buyers to claw back money at closing. How do we manage our working capital on our exit runway to protect our payout?

Question

Tyler Smith · Accepted Answer

The working capital peg is a standard part of any mid-market business transaction. It represents the amount of working capital, typically accounts receivable plus inventory minus accounts payable, that you must leave in the business at closing to ensure the buyer can run operations on day one without immediate cash injections.

If your working capital is volatile or poorly managed, the buyer will set a high peg based on historical averages, forcing you to leave more cash behind. To protect your payout, you must optimize and stabilize your working capital cycle during your exit runway.

Start by cleaning up your accounts receivable. Task your finance seat on the Accountability Chart with bringing down your days sales outstanding. Tighten your collections process and establish strict payment terms with your customers.

At the same time, audit your inventory management. Liquidate slow-moving or obsolete stock. Do not let capital sit dead in your warehouse simply because it is comfortable.

By systematically reducing your average working capital requirements over the twelve to twenty-four months preceding a sale, you establish a lower historical baseline. When the buyer calculates the peg, the required target will be lower, allowing you to extract more cash from the business at the closing table.