What Is a Working Capital Peg, and How Can It Cost You at Close?

Key Takeaways

• A working capital peg is the “normal” level of net working capital (receivables and inventory, minus payables and accrued expenses, with cash and debt left out) that a buyer expects the business to hand over at closing. If you deliver less than the peg, the purchase price drops dollar for dollar. If you deliver more, you get paid for the difference.
• Working capital adjustments now appear in more than 90% of private-company acquisitions, and buyers come out ahead more often than sellers: SRS Acquiom’s 2026 study of 1,570+ deals found 51% of final adjustments went to the buyer and 38% to the seller.
• The money is lost in how the peg is set and defined, long before closing day. Founders who build two years of clean, accrual-basis monthly balance sheets and calculate their own peg before signing the letter of intent (LOI) are in a far stronger position than founders who let the buyer’s diligence team calculate it for them.

The LOI said $30 million. Your attorney has walked you through the escrow and the rollover, and you have a number in your head for what lands in your account. Then the funds flow memo arrives, and the wire is $350,000 lighter than you expected. Nobody renegotiated the price. The difference sits in one line of the purchase agreement most founders skim: the net working capital adjustment, measured against a target called the peg.

A working capital peg is the amount of net working capital a buyer and seller agree the business needs to run normally. At closing, the actual working capital is measured against it, and the purchase price moves up or down by the gap. It is one of the most common mechanisms in a private-company sale and one of the least understood by the people selling. Here is how it works, where founders lose money on it, and what to do before you sign anything.

What Is a Working Capital Peg?

When a private equity firm or strategic buyer offers to buy your company at a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), that price assumes the business comes with enough working capital to keep operating the day after closing. Customers still owe you money, inventory is still on the shelves, and vendor bills are still coming due. The buyer is paying for a running business, and a running business needs that cushion.

Most deals are priced cash-free, debt-free. You keep the cash, you pay off the debt, and the buyer takes over everything else. That means the working capital that matters for the deal usually excludes cash and debt. A typical definition looks like this:

Net working capital = current assets (excluding cash) − current liabilities (excluding debt)

In practice, that is mostly accounts receivable, inventory, and prepaid expenses, minus accounts payable, accrued expenses, and sometimes deferred revenue or customer deposits. The exact list of accounts is negotiated, and that list matters as much as the number.

The peg (also called the target or normalized working capital) is the agreed “normal” level of that figure. If the business is delivered at closing with more working capital than the peg, the seller is paid the surplus. If it is delivered with less, the price is reduced by the shortfall. The mechanism exists so neither side can game the balance sheet in the weeks before closing. A seller cannot drain receivables into cash and walk away with it, and a buyer cannot demand a balance sheet loaded with more inventory than the business has ever carried.

How the Adjustment Works at Closing

The adjustment usually happens in two steps.

Before closing, you deliver an estimated closing balance sheet, and the purchase price paid at closing is adjusted based on that estimate. After closing, the buyer, who now controls your books, prepares the final closing statement. You then get a window to review it and dispute anything you disagree with. According to the SRS Acquiom study, the median deal gives the buyer 90 days to deliver that final statement and gives the seller 30 days to review it. Disputes that cannot be settled between the parties typically go to an independent accounting firm.

To make sure the money is there if the final number comes in below the estimate, most deals hold back part of the purchase price. SRS Acquiom found that 75% of deals in its dataset included a separate escrow just for the purchase price adjustment. The 2025 ABA Private Target Deal Points Study found that 42% of agreements with an adjustment escrow make that escrow the buyer’s sole source of recovery, up from 11% in 2017. That is a seller-friendly term worth asking for, because it caps your exposure at the escrow amount.

The dollars are usually modest, until they are not. The median final buyer claim in the SRS Acquiom data was 0.27% of transaction value, but roughly one in five claims reached 1% or more. On a $30 million sale, 1% is $300,000. That is a full year of salary for a senior hire, gone after you thought the deal was done.

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How the Peg Gets Set

There is no formula written into law for the peg. It is a negotiated number, and the buyer’s diligence team usually proposes it first, often inside its quality of earnings report.

The most common starting point is the average of month-end net working capital over the trailing 12 months. Averaging smooths out seasonality, so a landscaping company that carries heavy receivables in September and almost none in February is measured against its typical level rather than a peak or a trough. A thorough quality of earnings team will often restate historical net working capital before proposing a peg, booking missing accruals and correcting misclassified accounts month by month so the peg rests on the same accounting the closing balance sheet will use. Not every diligence team does that work, and when it gets skipped, the gap usually favors the buyer.

From there, the negotiation turns on a handful of questions:

• Which months count? A growing company carries more working capital today than it did a year ago, because more revenue means more receivables and inventory. Buyers often argue that the last three to six months better reflect what the business needs now, which produces a higher peg. Sellers prefer the full 12-month average. Both arguments have merit, and the right answer depends on how fast you are growing.
• Which accounts are in and which are out? Deferred revenue, customer deposits, accrued bonuses, income taxes payable, and related-party balances are all common points of disagreement. Moving a single account in or out can shift the peg by hundreds of thousands of dollars.
• What accounting rules apply? The purchase agreement will say whether closing working capital is measured under GAAP (Generally Accepted Accounting Principles), under your historical accounting practices, or under some combination. If those two approaches differ in your books, the gap becomes a negotiating point at the worst possible time.
• What has to be normalized? One-time items in the historical months, like a large customer prepayment or a bulk inventory purchase ahead of a price increase, distort the average and should be adjusted out before the peg is calculated.

Where Founders Actually Lose Money

Because the peg is designed to neutralize balance sheet games, a founder who simply runs the business normally through closing should come out close to even. The losses tend to come from somewhere else: the gap between how the historical months were accounted for and how the closing balance sheet is prepared.

Here is an illustrative example of how that plays out. A services company has been closing its books monthly with reasonable but incomplete accruals. Year-end bonuses are recorded when they are paid in March. Accrued PTO (paid time off employees have earned but not used) has never been booked. A few large vendor invoices tend to arrive late and get recorded in the month they show up rather than the month the work was done. None of this made much difference to how the founder ran the company.

The buyer’s diligence team calculates a peg of $4.0 million straight from those historical month-end balance sheets, without restating them for the missing accruals. After closing, the buyer’s accounting team prepares the closing balance sheet with full accruals: $180,000 of earned but unpaid bonuses, $90,000 of accrued PTO, and $80,000 of vendor invoices for work already performed. Those $350,000 of liabilities never appeared on the monthly balance sheets used to set the peg, but they appear on the closing statement. Closing working capital comes in at $3.65 million against a $4.0 million peg, and the purchase price drops by $350,000.

The business did not change. The accounting did. And because the buyer controls the books after closing, the buyer prepares the number you are measured against. A diligence team that restated the history first would have caught most of this, lowering the peg and shrinking or erasing the gap. You should not count on the buyer’s team to do that work for you. Having your own CFO restate the history before diligence starts is how you make sure it gets done.

The same pattern shows up in other forms. Companies on cash-basis accounting are especially exposed, because their historical balance sheets may not reflect receivables, payables, or accruals at all. Construction and project-based businesses face it with customer deposits and over- or under-billings on jobs in progress. SaaS companies face it with deferred revenue, which buyers often want included as a liability (lowering working capital) and sellers often argue is a non-cash obligation that belongs outside the calculation. SRS Acquiom lists these same issues, GAAP versus historical practice and the treatment of specific balance sheet accounts, among the most common causes of working capital disputes.

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If you are a year or two from a sale, your working capital history is being written right now, one month-end close at a time. An experienced CFO can rebuild the last 24 months on a consistent, accrual-basis footing, calculate your own peg, and make sure the number the buyer proposes is one you have already pressure-tested.

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How to Protect Yourself Before You Sign the LOI

The strongest position in a peg negotiation belongs to the seller who already knows the answer. That preparation starts well before a buyer is in the room.

Get your monthly close onto an accrual basis, and keep it there. Buyers set the peg from your historical month-end balance sheets, so those balance sheets need to include the same accruals the closing statement will. That means booking bonuses, PTO, unbilled vendor costs, and revenue recognition adjustments every month, not just at year-end. Two years of consistent history is the target, because that is roughly what a buyer’s diligence team will want to review.

Calculate your own peg before the buyer does. Build a schedule of month-end net working capital for the last 24 months, apply the definition you expect the buyer to use, normalize one-time items, and look at the trend. If you are growing quickly, model what a trailing three-month peg would look like against a trailing 12-month peg, so you know what the buyer’s argument will cost you before they make it.

Negotiate the methodology in the LOI. Many LOIs say nothing about working capital beyond “a normalized level to be agreed.” That leaves the most consequential decisions for later, after you have granted exclusivity and lost most of your bargaining power. Push to agree on at least the averaging period and the major included and excluded accounts at the LOI stage.

Attach an illustrative calculation to the purchase agreement. The best protection against a dispute is a worked example, built from a real historical balance sheet, showing exactly which accounts are included and how each is calculated. If the closing statement follows the same template, there is far less room to argue.

Watch the mechanics, not just the number. Ask for a threshold (an amount the final adjustment must exceed before anyone pays anything) to avoid fights over small variances, a separate and reasonably sized adjustment escrow, and language making that escrow the buyer’s sole recovery for working capital claims. If you are rolling equity into the new company, the adjustment affects you twice, once in cash at closing and again in the value of your rollover equity.
Rollover equity: an Example
Here is how those terms play out on an illustrative $30 million sale. The purchase agreement sets a $50,000 threshold and a $300,000 adjustment escrow, about 1% of the price, as the buyer’s sole recovery for working capital claims. If the buyer’s final statement shows working capital $40,000 below the peg, nothing changes hands, and nobody spends three months arguing over a rounding error. If it shows a $420,000 shortfall, the buyer collects $300,000 from the escrow and stops there. Without the sole-recovery language, the buyer could come after you for the remaining $120,000 long after the proceeds have been spent or reinvested.

Review the buyer’s closing statement line by line. Thirty days goes fast. SRS Acquiom found that sellers disputed the buyer’s initial calculation in about 29% of deals, and disputed adjustments almost always moved in the seller’s favor, with an average claim reduction of $687,000. A buyer’s first closing statement is an opening position, and you should treat it that way.

This is also where the working capital conversation connects to the rest of your sale preparation. The buyer is pricing your company off adjusted EBITDA, and a buyer who finds sloppy accruals while setting the peg will look harder at your earnings too. The same discipline that protects your peg protects your multiple. It also tends to free up cash well before any sale. Collecting faster and holding less inventory makes the business more valuable whether you sell next year or never.

Frequently Asked Questions

What is a working capital peg in M&A?

A working capital peg is the target level of net working capital that a buyer and seller agree the business needs to operate normally. At closing, the company’s actual net working capital is compared to the peg, and the purchase price is increased or decreased by the difference, usually dollar for dollar.

How is a working capital peg calculated?

The peg is most often calculated as the average of month-end net working capital over the trailing 12 months, with one-time items normalized out. Net working capital in this context usually means current assets excluding cash, minus current liabilities excluding debt. Buyers and sellers frequently negotiate over the averaging period, especially for fast-growing or highly seasonal businesses, and over which specific accounts are included.

What happens if working capital is below the peg at closing?

The purchase price is reduced by the shortfall. If the peg is $4.0 million and closing working capital comes in at $3.7 million, the seller receives $300,000 less. That reduction is usually collected from an adjustment escrow funded at closing, and in some deals the buyer can also pursue the seller directly or offset it against other payments if the escrow does not cover it.

Does deferred revenue count in net working capital?

It depends on the deal. Buyers often argue that deferred revenue (cash collected for products or services not yet delivered) belongs in working capital as a liability, because the buyer will bear the cost of delivering that service. Sellers often argue it should be excluded or treated as debt-like only to the extent of the cost to fulfill. For SaaS and subscription businesses, this one decision can move the price materially, so settle it early. Ascent CFO’s guide to deferred revenue for SaaS companies covers how the account is built.

Can you negotiate the working capital peg?

Yes, and you should. The peg is a negotiated number, not an accounting fact. The averaging period, the included accounts, the treatment of seasonality and growth, and the accounting principles used at closing are all open points. Sellers who arrive with their own well-documented calculation negotiate from a much stronger position than sellers who respond to the buyer’s proposal for the first time.

How long does the working capital true-up take after closing?

In the median deal tracked by SRS Acquiom, the buyer has 90 days after closing to deliver its final working capital calculation, and the seller has 30 days to review and dispute it. Disputed items that the parties cannot settle typically go to an independent accountant, which can extend the timeline by several more months.

A Number Worth Owning

The working capital peg rarely makes the headline of a deal, but it decides how much of the headline actually reaches you. Founders who treat it as a closing-week technicality hand the calculation to the buyer. Founders who build clean monthly history and calculate their own number go into the negotiation knowing what normal looks like for their business, and they can defend it.

We help founders and CEOs of growth-stage companies across the country get ready for a sale long before the buyer arrives, from rebuilding accrual-basis financials to modeling the working capital peg and supporting diligence through closing. Learn more about our M&A advisory support and our fractional CFO services, or read our guides on how to prepare for the sale of your company and whether your company is ready to be acquired.

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