I keep hearing about buyers adjusting the purchase price at closing based on a working capital peg. What is this adjustment, and how do I manage our balance sheet over the next year so I do not get hit with a massive cash reduction at the closing table?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common areas of friction in a business sale. Buyers do not just buy your equipment and goodwill; they also expect the business to have enough cash, accounts receivable, and inventory to operate on day one without requiring an immediate cash injection.

The peg is the target level of net working capital that you must deliver at closing, usually calculated as an average of your working capital over the preceding twelve months. If your actual working capital at close is below this peg, the purchase price is adjusted downward, meaning you walk away with less cash. If it is above, you are paid more, though buyers often fight this.

To avoid a painful surprise, you must manage your balance sheet tightly during the runway to your sale. Avoid the temptation to artificially inflate your cash balance by delaying payments to vendors or aggressively collecting receivables right before closing, as the buyer's working capital calculation will normalize these actions. Instead, focus on maintaining healthy, consistent working capital ratios. Work with your CPA to model your historical working capital cycles so you can negotiate a fair, realistic peg in the letter of intent.