Working capital peg
A working capital peg is the agreed normal level of receivables, inventory and payables a seller must deliver at closing, with a price adjustment
The working capital peg is a target amount of net working capital, usually receivables plus inventory minus payables, that the parties agree the business needs to operate normally. At closing, the actual working capital is measured against the peg and the purchase price is adjusted up or down by the difference.
The peg exists to stop either side gaming the closing date. Without it, a seller could collect receivables, run down inventory and delay paying suppliers in the final weeks, handing the buyer a business with no cash to operate. A buyer, equally, could demand an unrealistically high level of working capital and effectively reduce the price. In BC deals the peg is typically set from a normalised trailing average, with seasonal businesses needing special care.
In practice the peg should be agreed in the letter of intent, along with the definition of working capital, the accounting policies and how disputes are resolved. Inventory counting rules, treatment of obsolete stock, prepaid customer deposits and accrued liabilities all need to be addressed. We set the peg with the seller's historical figures, model how it affects the cash the seller nets and brief both sides' accountants and lawyers so the closing adjustment is a calculation rather than an argument.
Start with a confidential conversation.
Tell Ali where the business is and what you want to happen next. You leave with a straight read on value, timing and the two or three moves that matter, whether or not we work together.