The working capital peg is, structurally, the most consequential number in a purchase agreement that most sellers negotiate last, if they negotiate it at all. By the time the adjustment mechanism surfaces in the definitive agreement, the leverage has already shifted to the buyer. The LOI is signed. The exclusivity clock is running. The seller wants to close.

What the Peg Actually Measures

A working capital peg sets the expected level of net working capital that must be in the business at close. If actual working capital at close falls below that peg, the shortfall reduces the purchase price dollar-for-dollar. Buyers typically propose the peg as a trailing twelve-month average, which sounds neutral and methodological. It is neither.

A twelve-month average captures seasonal peaks. A business with a heavy Q4 will show elevated receivables and inventory across the trailing period. The peg rises to reflect those peaks, but the seller is closing in Q2. The structural consequence is a near-automatic shortfall at settlement, funded entirely from seller proceeds.

• Trailing twelve-month averages are the buyer’s default proposal, not an industry standard.
• Peg definitions vary significantly on what counts as current: deferred revenue treatment, accrued liabilities, intercompany balances, and owner distributions all carry definitional risk.
• The measurement methodology, who calculates it, using what accounting principles, with what dispute resolution period, is as important as the number itself.

Where Sellers Lose the Negotiation

The error is sequencing. Sellers accept an LOI that reads “working capital to be agreed upon in definitive documentation” without anchoring the methodology or the reference period. That language invites the buyer to introduce a favorable calculation methodology in the first draft of the purchase agreement, weeks into diligence, when walking away carries real cost.

Buyers with experienced M&A counsel will also propose pegs using GAAP with a buyer-favorable interpretation of specific accruals. Sellers who have been running their books on a hybrid or modified-cash basis face a reconciliation problem: the peg gets calculated on a basis the business has never actually operated under, producing a phantom shortfall.

A secondary exposure sits in the post-close true-up window, typically 60 to 90 days. During that window, the buyer controls the books. A seller who has not negotiated the dispute resolution mechanism, including independent accountant appointment rights and timeline triggers, is operating without a floor on the adjustment.

Negotiating Position Before the LOI

The structural leverage is available before exclusivity. A seller who tables specific peg language in the LOI, or at minimum a defined methodology, removes the buyer’s ability to introduce favorable framing later. Relevant terms to address at LOI stage include: the reference period (a specific normalized month is defensible), the definition of current assets and current liabilities with carve-outs named explicitly, and a cap or collar on the post-close adjustment.

Sellers running businesses with meaningful deferred revenue, subscription prepayments, or seasonal inventory cycles have additional structural exposure worth quantifying in advance. Modeling the expected closing-date working capital under the buyer’s proposed methodology, before signing, takes a qualified CFO roughly half a day. The cost of not doing it frequently exceeds the cost of the entire diligence process.

The Operator Read

The working capital peg is not a technical afterthought. It is a pricing mechanism dressed in accounting language, and buyers with scale negotiate it with that understanding. Sellers who treat it as a detail to finalize in documentation are, functionally, repricing their deal downward after the competitive tension has evaporated. The time to negotiate the peg is when the buyer still wants the exclusivity more than the seller needs the close.