In brief
A working capital peg defines the operating capital the seller must deliver at closing. Start with monthly receivables and inventory less operating payables and accruals, then assess seasonality and the agreement’s exclusions. Closing NWC above the peg generally increases price; a shortfall reduces it. Cash, debt and debt-like items need separate treatment to avoid counting the same obligation twice.
Key takeaways
- A working capital peg defines the operating capital the seller must deliver at closing.
- Reconcile the inputs to source records and make assumptions explicit.
- Use the result to frame questions, not as an assurance conclusion.
Define the operating perimeter
A common operating NWC definition is receivables plus inventory less trade payables and operating accruals. The agreement may exclude aged balances, taxes or specific accounts and may use accounting principles that differ from the seller’s monthly reporting. Cash, debt and debt-like items typically belong in separate deal bridges. Agree the definitions before negotiating the amount.
Illustrative worked example
AR $250,000 + inventory $180,000 − AP $160,000 − accruals $70,000 produces operating NWC of $200,000 under this simplified definition.
Use monthly records, not one convenient balance
Calculate at least twelve monthly balances and inspect collections, inventory builds and payment timing. An arithmetic average can be a starting point, but growth and seasonality may require a different agreed target. Twenty-four months can help distinguish a repeatable pattern from a one-off event. Review aged receivables and obsolete inventory rather than averaging uncollectible balances into the peg.
Illustrative worked example
Monthly balances average $200,000, but seasonal inventory creates a $320,000 requirement before peak sales. A closing date in that period may require more than the simple average.
Calculate the adjustment without double-counting
Under the convention used here, closing NWC minus the peg is the price adjustment: positive increases consideration and negative reduces it. Apply the signed agreement and settlement procedures. An overdue liability counted as debt-like should not also reduce NWC unless the agreement explicitly requires that result. The tool demonstrates arithmetic, not contract interpretation.
Illustrative worked example
A $200,000 peg and $175,000 closing NWC imply a $25,000 price reduction. A $225,000 closing balance implies a $25,000 increase.
Frequently asked questions
Educational content — not an audit, assurance opinion, or investment or legal advice.
