Working Capital Peg

A working capital peg is the target amount of working capital that has to be in the business at close. Working capital is the cash and near-cash the business needs to operate day to day: receivables and inventory minus the bills it owes. The peg makes sure the seller hands you a business with a full tank, not an empty one.

Why it matters to a buyer

Without a peg, nothing stops a seller from draining the business before close: collecting every receivable, running down inventory, and stretching payables, then handing you a shell that can't make payroll on day one. You'd have to inject cash immediately just to keep the lights on. The peg, set in the LOI and finalized in the purchase agreement, protects you from exactly that.

How the true-up works

You and the seller agree on a target (the peg), usually based on the average working capital the business has carried over the past 12 months. At close, you measure the actual working capital and compare:

• Actual is above the peg: you pay the seller the difference.
• Actual is below the peg: the seller credits you the difference (often via a price reduction).

This "true-up" usually happens 60 to 90 days after close, once the final numbers settle.

Worked example

The peg is set at $200,000, the trailing-12-month average. At close, actual working capital comes in at $160,000 because the seller collected aggressively in the final weeks. You're owed the $40,000 shortfall, typically knocked off the purchase price. Get the peg wrong (or skip it) and you're funding that $40,000 gap out of your own pocket on week one (which is the last time you want a cash surprise).