Working Capital Peg & Historical Build
The working capital peg quietly moves more money at close than almost any other diligence item. What belongs in the historical build, how the peg gets set, and how sellers lose value here.
The working capital peg moves more money at close than most sellers realize. The historical build is what protects it.
Buyers price transactions on a cash-free, debt-free basis with a normalized level of working capital delivered at close. That normalized level — the “peg” — determines how much cash the seller keeps versus how much stays in the business. A peg set $2 million higher than it should be sends $2 million to the buyer at close. The seller often doesn't see the impact until wire day, and by then the negotiation is over.
The peg is negotiated. The negotiation is won by the party with the better historical analysis. Sellers who show up with twenty-four months of clean, defensible monthly working capital — with the seasonality quantified, the anomalies footnoted, and the normalization logic documented — anchor the peg discussion on their terms. Sellers who show up with a spreadsheet the buyer's team rebuilds independently lose the negotiation before it starts.
We build the working capital story that holds. Historical build from the trial balance, peg definition supported by the seller's own analysis, and the ongoing tracking through close that keeps surprises out of the wire calculation.
What Belongs In the Build
The historical build, broken down.
Monthly Working Capital, 24 Months
A/R, inventory, prepaid expenses, less A/P and accrued liabilities. Non-operating items excluded. Reconciled to the balance sheet each month. Trended for seasonality.
Definition — What's In, What's Out
Cash, debt-like items, income tax accounts, deferred revenue treatment (long-term vs current), intercompany accounts, unclaimed customer credits — every item explicitly categorized as operating working capital or not.
Seasonality Analysis
Businesses with seasonal patterns need working capital normalization that reflects the pattern. A twelve-month average is a starting point, not a peg. Trailing-twelve-month monthly average with seasonal adjustment is usually the right frame.
Anomaly Documentation
The A/R spike from the large customer who paid late. The inventory build for a specific product launch. The prepayment cycle from an annual insurance premium. Every anomaly documented and factored into or out of the peg discussion.
Growth Adjustment
If the business is growing, the working capital needed to support the business grows too. The peg conversation has to account for whether the buyer is priced against last year's working capital or a forward-looking normalized level.
Close-Date Estimate
The estimated closing working capital — used to size the true-up mechanism. Both sides negotiate this. The seller with the better historical build negotiates it better.
How the peg gets negotiated.
Definition first. Both sides agree on what constitutes working capital — which accounts are in, which are out, how deferred revenue is treated, how intercompany is handled. Get definition wrong and the number arguments that follow are meaningless.
Historical build second. The 24-month monthly view is the reference. Seasonal patterns, growth trajectories, and material anomalies get identified and adjusted. Both sides usually converge on the historical pattern once definitions align.
Peg mechanics third. Fixed-dollar peg, days-of-sales peg, or a range with true-up mechanics. Each has trade-offs. The right choice depends on the business's working capital volatility.
Closing estimate fourth. With the peg set, both sides estimate closing working capital. The gap between the peg and the estimate drives cash movement at close.
Post-close true-up fifth. Actual closing working capital calculated within 60-120 days of close. Adjustments settled per the agreement. This is where sellers who left ambiguity get penalized months after they thought the deal was done.
The most expensive peg mistakes we see.
Accepting the buyer's initial peg proposal. The buyer's opening peg is almost always high (favors the buyer). A seller without a defensible counter proposal from their own analysis loses ground immediately.
Deferred revenue treatment. Buyers frequently propose that deferred revenue reduces working capital (i.e., is debt-like). Sellers who don't have a defensible position on why deferred revenue is or isn't operating working capital lose material value on this single item.
Weak inventory documentation. Slow-moving, obsolete, or work-in-process inventory that buyers can discount aggressively without seller resistance because the seller's own analysis wasn't rigorous.
Post-close surprises. Accounts payable that were quietly stretched pre-close, receivables that turned out to be uncollectable, credits owed to customers that weren't reserved. Each becomes a post-close adjustment against the seller.
If the Peg Discussion Is Ahead
Build the Analysis That Wins the Negotiation.
Four to six weeks of finance work produces the historical build, the peg proposal, and the negotiation position. Deployed anytime from twelve months out through LOI — the earlier the cleaner.
Tell Us the Situation
The Business and the Timeline.
Where the process is, how the working capital is currently tracked, and when the peg discussion is likely to start. Same-day response.
Schedule a Discovery Call
We’ll reach out within one business day.