How is a working capital peg set in a business sale?

The peg is the amount of working capital the buyer expects to find in the business when it takes over. The agreement sets whether, and in which direction, the price adjusts if closing day shows less or more than the target. Setting the target is a negotiation, and it goes best when both sides work from the same records and agree on the method before they argue about the number.

Choosing the period to measure

Most pegs start from the business’s own history, averaged over a stretch of recent months. The choice of period affects the target, so each side may argue for a different one. Ask your accountant which period fairly represents normal operations, and be ready to explain any month that looks unusual.

Seasonality and one-off items

A business with a busy season carries very different inventory and receivables at different times. A single snapshot can mislead, so the parties may average across a full cycle or set a target tied to the closing month. Unusual items, such as a large one-time order, a delayed supplier payment or an unpaid insurance claim, may be set aside so they do not distort the target, if the agreement says so.

Which balance-sheet lines count

The parties must agree what is in and what is out. Cash and debt are often handled separately, as the comparison of a working capital peg with cash-free, debt-free explains. Receivables, inventory, prepaid items, payables and customer deposits are the usual candidates. Whether a line is counted, and how it is valued, can change the target materially.

Writing the method down

Agree a worked example in a schedule to the purchase agreement: the accounts included, the accounting policies applied, and a sample calculation from a past month. The later true-up then follows a script, as how a post-closing adjustment works describes.