The buyer slipped a net working capital peg into the definitive agreement that is significantly higher than our normal operating cash requirements. How does working capital manipulation affect our net proceeds, and how do we negotiate a fair peg?

Question

Tyler Smith · Accepted Answer

Net working capital adjustments are one of the most common ways sellers lose money in the final days of a transaction. A deal is typically structured on a cash-free, debt-free basis with an agreement that the seller will deliver a normalized level of net working capital at close, known as the peg.

The purpose of the working capital peg is simply to ensure the buyer receives sufficient current assets (mostly accounts receivable and inventory) less current liabilities (accounts payable and accrued expenses) to operate the company on day one without injecting fresh cash. However, buyers often attempt to inflate the target peg during late-stage diligence. If the final working capital delivered at close is lower than the agreed peg, the purchase price is reduced dollar for dollar from your proceeds or drawn from your indemnity escrow.

To defend your position, insist that the peg is calculated using a consistent, trailing-twelve-month average rather than a cherry-picked snapshot during your seasonal peak. Ensure the accounting methodology used to establish the target peg matches the exact methodology used for the post-close true-up.

Watch for aggressive adjustments where the buyer attempts to classify normal operating liabilities as debt-like items while excluding legitimate current assets like prepaid expenses or work-in-progress inventory. Every dollar shifted out of working capital into debt-like items reduces your cash at close.

Establishing a transparent, twelve-month rolling calculation early in the LOI stage prevents the buyer from weaponizing working capital during the legal drafting phase. Treat the peg negotiation with the same rigor as the headline EBITDA multiple.