How the Net Working Capital Peg Gets Set (and How to Keep It From Costing You Money at Close)

The purchase price on the term sheet isn't the purchase price. There's a second number, usually buried in an exhibit, that moves the final proceeds dollar for dollar in either direction: the net working capital peg. Deliver less working capital at closing than the peg and the price comes down. Deliver more and it goes up. And the peg is built from the same monthly balance sheets your finance team produces every close.

That's why this is an FP&A problem and not just a lawyer problem. If you're PE-backed you'll meet the peg on both sides: as the buyer when the platform does an add-on, and as the seller at exit.

What the peg actually is

One-line definition: the net working capital peg is the agreed "normal" level of working capital the seller must hand over at closing so the business can run on day one without the buyer putting in cash.

Most deals are cash-free, debt-free. The seller keeps the cash and pays off the debt. What's left in the middle is working capital: receivables, inventory, prepaids, less payables and accrued expenses. The buyer wants enough of that middle to operate. The seller wants to keep as much of it as possible. The peg is where they meet.

This used to be an optional feature of a deal. Not anymore. SRS Acquiom's 2026 Working Capital Purchase Price Adjustment Study, built on more than 1,500 private-target deals worth over $385 billion, found working capital adjustments in more than 90% of private-target transactions, up from about 50% a decade ago. If you buy or sell a company in 2026, expect one.

How the number gets calculated

Three steps, and each one is a negotiation.

Step 1: define what counts

The purchase agreement will have an exhibit that lists, line by line, which balance sheet accounts are in and which are out. Trade receivables net of reserve, inventory, prepaid expenses, trade payables, and accrued operating expenses are almost always in. Cash, debt, and income taxes are out. The fights happen in the gray zone: deferred revenue and customer deposits (a liability the buyer has to fulfill), accrued bonuses (earned this year, paid after close), related-party balances, and the current portion of leases.

Get this exhibit right and half the later arguments disappear.

Step 2: pick the lookback

The peg is typically the average of the defined working capital over a trailing period, most often 12 months, sometimes 6, using month-end balances. A 12-month average smooths out seasonality and the odd month where a big customer paid late. Schneider Downs describes the standard approach as a trailing 12- or 6-month average, adjusted for one-time anomalies like an unusually large customer prepayment or a stretch where the company delayed paying vendors.

Which period gets picked matters. A business growing 25% a year needs more working capital today than its 12-month average suggests. A buyer will argue for the recent months. A seller will argue for the full year. Neither is wrong. Bring the data.

Step 3: normalize and agree

Strip out the noise: the one-off inventory build for a contract that fell through, the receivable from the customer who went bankrupt, the vendor you stopped paying for three months during a dispute. Then agree the number and write it into the agreement, usually with a collar. Womble Bond Dickinson notes that a typical collar means no adjustment at all unless the gap between actual and peg exceeds a set amount, say $100,000 or 1% to 2% of the peg.

A worked example

Say the business does $24M of revenue. Under the agreed definition, month-end working capital over the trailing 12 months ranged from $2.6M in the slow months to $3.4M in the busy ones, averaging $3.0M. After normalizing out a $200K receivable from a customer that went out of business in March, both sides settle on a $3.0M peg.

At closing, the seller delivers an estimated closing balance sheet showing $2.7M of working capital. That's $300K short, so the price drops by $300K on the day. Sixty to ninety days later, the buyer prepares the actual closing balance sheet and lands at $2.65M. Another $50K comes out of escrow. The seller just gave back $350K on a deal they thought was done.

Where did it go? Usually the last 60 days before close. Collections got pushed hard because everyone wanted the cash balance high. Payables got stretched. Inventory ran lean. Every one of those moves pulled dollars out of working capital, and in a cash-free debt-free deal every one of those dollars came straight off the price.

Where the fights actually happen

Can't we just set the peg low and move on? A seller would love to. The buyer's quality of earnings team will build their own trailing calculation from your general ledger and push back with data. If your monthly balance sheets are clean and reconciled, you negotiate from strength. If they aren't, you negotiate from theirs.

What's the most common post-closing argument? Consistency. The agreement says the closing balance sheet has to be prepared using the same methodology as the peg. So if the peg was built with a 3% AR reserve and the buyer books 8% at closing, that's a dispute. Same with inventory obsolescence reserves, accrual cut-off, and how deferred revenue gets classified. Judgment calls that never mattered in your monthly close suddenly matter a great deal.

Does this hit us as the buyer of an add-on? Yes, in reverse. A platform buying a $6M add-on from a founder often finds the target's balance sheet was never closed monthly at all. You'll have to reconstruct twelve month-end balance sheets to set a peg, and the founder will argue the average is too high because they "always ran lean." Build the schedule yourself and walk them through it line by line.

What to do 12 months before a deal

Start closing the balance sheet monthly, not just the P&L. A lot of $5M–$50M companies close revenue and expenses carefully and let the balance sheet drift until year-end. Every month-end that isn't reconciled is a month a buyer can challenge.

Write down your accounting policies for reserves, accruals, and cut-off, and apply them the same way every month. The peg dispute you avoid is the one where both sides used the same method.

Put working capital in the monthly reporting package. DSO, DPO, inventory days, and the total in dollars, trended. If the board sees it every month, nobody is surprised at the LOI, and you have twelve months of documented "normal" ready to hand to the other side.

And in the final 90 days before close, resist the urge to squeeze. Collecting early or paying late doesn't create value in a cash-free debt-free deal. It moves dollars from the price to the cash line, and the true-up moves them right back.

The peg is one of the few deal terms where the finance team, not the banker or the lawyer, decides how it goes. The number is built from your books. Make sure your books are ready to defend it.

Plametrix does this as an outsourced FP&A service: monthly balance sheet close, working capital reporting, and deal-ready schedules for PE-backed and growing companies.