The buyer is proposing a working capital peg that feels incredibly high. How do we calculate a fair net working capital target without leaving cash on the table?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common places sellers get quietly robbed at the closing table. Buyers use an inflated peg to force you to leave excess cash in the business to fund their initial operational expenses post-closing.

Net Working Capital (NWC) is typically calculated as Current Assets (excluding cash) minus Current Liabilities (excluding debt). The "peg" is the target amount of NWC you must deliver at closing. If your actual NWC at close is below the peg, the purchase price is adjusted downward dollar-for-dollar. If it is above, you get paid the difference.

To prevent the buyer from setting an unfair peg, look at your historical cash cycles. Buyers will often try to use the single highest month of working capital as the target, or a simple 12-month average that does not account for seasonality. If your business is highly seasonal, a flat 12-month average will penalize you if you close during a peak inventory or accounts receivable month.

Demand a trailing 12-month (TTM) daily or monthly average that accurately reflects your business cycle. Ensure that bad debt write-offs, obsolete inventory, and pre-paid expenses are clearly defined and accounted for in the calculations. Bring your numbers to the negotiation table early, backed by the weekly scorecards and cash flow metrics you track in your EOS® system. Do not let the working capital peg become an afterthought; negotiate it parallel to the purchase price.