How do buyers calculate the working capital peg during an acquisition, and what financial disciplines must we build years ahead of time to avoid leaving cash behind?

Question

Tyler Smith · Accepted Answer

The working capital peg is one of the most common areas where unprepared business owners lose substantial money in the final hours of a deal. Buyers purchase a business as a going concern, which requires an agreed-upon level of operational liquidity to sustain normal operations post-closing. The peg is the target baseline for net working capital (current assets minus current liabilities, excluding cash and funded debt).

Acquirers typically calculate this peg by averaging your company's trailing twelve-month net working capital. If your net working capital at the closing table is higher than the peg, you receive an upward purchase price adjustment. If it falls below the peg, you must fund the shortfall out of your transaction proceeds.

If your financial hygiene has been loose over previous years, your working capital baseline will be artificially elevated, trapping significant cash in the business. Common culprits include sluggish accounts receivable collections, carrying obsolete or slow-moving inventory, and paying vendor bills prematurely.

To protect your proceeds, implement strict working capital disciplines at least two to three years before going to market. Add Days Sales Outstanding (DSO) and inventory turnover metrics to your weekly EOS Scorecard. Enforce disciplined invoicing standards, shorten customer credit terms, optimize inventory reorder points, and negotiate extended terms with suppliers. By consistently running lean, tight working capital, you establish a lower baseline peg, ensuring you take the maximum amount of cash away from the closing table.