Working capital peg
A working capital peg is an agreed target level of working capital — receivables, inventory and prepaid expenses, less payables — that must be in the business on closing day. If actual working capital lands above or below the peg, the purchase price is adjusted after closing to make up the difference.
The peg exists because a business needs a certain amount of cash tied up in day-to-day operations simply to keep running. A buyer is paying for a going concern, not an empty shell, so the agreement fixes the level of fuel in the tank at handover.
Why it matters more than it sounds
Without a peg, a seller has every incentive to collect receivables aggressively, run inventory down and stretch payables in the weeks before closing. Each of those turns working capital into cash in the seller’s pocket and leaves the buyer to refill it from their own funds immediately after closing — an unbudgeted cost on top of the purchase price.
How it is normally settled
- The peg is set from a historical average, usually the trailing twelve months
- Closing accounts are prepared shortly after closing, often within 60 to 90 days
- The price adjusts up or down against the peg, frequently settled from a holdback
- A dispute mechanism names an independent accountant to decide disagreements
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryInventory Count and Valuation on Closing Day in an Ontario Business Sale
- 03Treadstone LawLegal commentaryHow to Read a Business's Financial Statements Before You Buy in Ontario
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