Working capital pegs at close: how buyers and sellers avoid the post-close fight

What is a working capital peg?

A working capital peg is the target level of net working capital the seller agrees to deliver at closing, usually as part of the purchase price mechanics. Net working capital is typically current operating assets minus current operating liabilities, though the exact definition is deal-specific. The peg is the agreed normal level for that business. At close, if delivered working capital is above the peg, the buyer often pays more; if it is below, the price is usually reduced. The peg turns a vague promise to leave enough to run the business into a measurable closing condition.

Why do SMB deals need a peg even when the business feels simple?

Owner-operated companies rarely keep institutional cash policy, so without a peg both sides invent the fight after the wire. Common failure modes when there is no peg:

• The seller can sweep cash or delay payables and still claim the headline price was agreed.
• The buyer can treat every AR shortfall as a purchase-price problem with no shared baseline.
• Both sides argue about whether cash is in or out of the deal after money already moved.

A peg does not replace diligence on revenue quality. It separates enterprise value from day-one operating fuel so you are not re-litigating price under another name. Keep peg language and closing schedules in one place—not a side thread. Start a structured path on Biz Checkout.

What usually sits inside working capital?

Counsel and the purchase agreement control the exact definition; operators commonly debate the same buckets. Typical inclusions and fights:

• Cash — included, excluded, or capped; many SMB deals treat excess cash separately from the peg.
• Accounts receivable — often included at face or with a collectibility haircut; aged AR is where fights start.
• Inventory — included at an agreed valuation method, not vibes.
• Prepaid expenses — sometimes in, sometimes out.
• Accounts payable and accrued expenses — usually subtract from the peg base.
• Short-term debt and credit lines — often treated as debt in the funds flow, not operating working capital.

Items that are usually handled elsewhere include tax special covenants, intercompany notes, litigation reserves, and long-term debt. Misfiling debt as AP is a classic seller-friendly error; assuming cash is always included is a classic buyer surprise.

How do you set the peg without fake precision?

You do not need a private-equity model. You need a definition both sides can audit. Practical sequence:

1. 1
   Pick a definition early

   Often in the LOI or first draft of the APA: what is in, what is out, and how inventory is valued. See what a letter of intent is.

2. 2
   Look at a trailing period

   Commonly twelve months of month-end balances, or a seasonally adjusted window for seasonal businesses.

3. 3
   Agree a target

   Often a trailing average, a recent steady month both accept, or a negotiated floor that still lets the business operate.

4. 4
   Agree measurement and process

   Closing balance sheet, physical inventory count rules, who prepares the schedule, and how long the buyer has to dispute it.

5. 5
   Agree the adjustment mechanics

   Dollar-for-dollar true-up or a small collar so nickels-and-dimes fights do not eat the closing week.

Seasonal businesses need an explicit seasonal note. Averaging twelve months can under-fund a buyer who closes right before the busy season, or over-fund a buyer who closes in the quiet month. Say that out loud in the LOI.

What failure modes should you watch for?

Most post-close fights come from missing definitions, not from bad luck. Watch for:

• No definition, only a vibe — normal working capital with no schedule is not a peg.
• Inventory fantasy — book inventory that has not been counted, or obsolete stock still carried at full cost.
• AR that is really bad debt — pegging face AR without aging rules transfers the collection problem at full price.
• Seller cash sweep with no excess-cash clause — the buyer funds day one out of pocket and feels cheated even if price was met.
• True-up with no escrow holdback — the adjustment becomes a collection problem instead of a release condition.
• Mixing debt payoffs into the peg — credit-line payoffs belong in the funds-flow schedule, not hidden inside AP.

Public-record diligence still happens in parallel. See BizFacts diligence and UCC and tax liens. A clean peg does not cure a tax lien.

Where do escrow and the deal room help?

A peg only works if the schedule, the count, and the money share one process. In practice:

• Diligence materials and aging reports live behind an NDA gate, not in forwardable email.
• The LOI names that a working capital peg or locked-box alternative will be used.
• Escrow can hold a slice of price against the post-close true-up so the adjustment is funded — see escrow in a business sale and the verified deal room path.
• Inventory counts and closing schedules stay versioned in the room instead of final_FINAL_v7.xlsx in three inboxes.

Platforms provide rails. Your attorney still drafts the definition and the adjustment language for your deal.

Stop negotiating working capital in a side email after price is done. Use Biz Checkout for verified SMB buy and sell with NDA-gated financials and escrow deal rooms, and pull entity records anytime on BizFacts.