How to Negotiate the Working Capital Peg When Selling Your Business

What the Working Capital Peg Actually Is

The working capital peg is the dollar amount of operating working capital a buyer expects to receive at closing — calculated, by convention, as the trailing twelve-month average of (current operating assets minus current operating liabilities). It is the single most-negotiated economic term in a lower middle market business sale after the purchase price itself, and it is the one most owners are least prepared for.

Working capital here does not include cash (the seller almost always keeps the cash) and does not include long-term debt (which is treated separately as a deduction from purchase price). It does include accounts receivable, inventory, prepaid expenses, accounts payable, accrued liabilities, and customer deposits or deferred revenue. The buyer wants enough working capital delivered to fund the operating cycle for 30–60 days post-close without injecting their own capital.

How the Peg Is Calculated

The standard approach: take the last 12 monthly balance sheets, compute (current operating assets) minus (current operating liabilities) for each month-end, and average the 12 values. That average becomes the peg. The dollar amount of working capital you actually deliver at closing is compared to that peg. The difference is a dollar-for-dollar purchase price adjustment.

Here is a worked example. Suppose your trailing twelve-month average working capital is $520K. The buyer proposes that as the peg in the letter of intent. You close on August 15 with $430K of working capital actually on the balance sheet. The buyer reduces the purchase price by $90K at closing. If you had instead closed with $580K of working capital, you'd receive an additional $60K on top of the agreed price. Same business, same date, $150K of swing — purely on working capital timing.

The Three Components That Most Often Trip Sellers Up

Three balance sheet items consistently cause the biggest peg surprises in lower middle market deals.

• Deferred revenue. If your business collects cash before delivering services (think annual maintenance plans, retainer agreements, prepaid SaaS subscriptions, customer deposits), that cash sits on the balance sheet as deferred revenue — a current liability. It reduces working capital. If you collected $200K of annual maintenance contracts in January and you close in February, that $200K isn't yours — it belongs to the operating business the buyer is acquiring, and you have to deliver it as working capital.
• Old accounts receivable. Buyers' quality of earnings teams will exclude any receivable over 90 days from the peg calculation, on the theory that the collection risk shouldn't transfer. If 20% of your $500K AR is over 90 days, the peg only credits you for $400K of AR. Sellers who let aging AR build up are silently shrinking their delivered working capital.
• Inventory adjustments. Slow-moving and obsolete inventory gets written down or excluded entirely. If you carry $300K of inventory but $80K is dead stock that nobody buys, the buyer's QofE will adjust the peg to recognize $220K.

Comparison: Cash Sale vs Working Capital Peg

Owners often confuse the headline purchase price with the actual cash they receive. Compare two identical $5M businesses:

• Business A has a clean $500K peg and delivers exactly $500K at closing. Owner receives the full $5M minus any debt assumed and transaction expenses.
• Business B has the same $500K peg but delivers only $350K at closing because the seller didn't manage seasonal timing. Owner receives $5M minus $150K of peg shortfall minus debt minus expenses. That's $150K less than Business A.

The two businesses sold for the same headline price. The seller of Business B walked away with $150K less cash because of one balance sheet line item nobody talked about until 30 days before close.

Valuation Impact

The working capital peg does not directly change your enterprise value — but it changes your net proceeds, which is what actually lands in your bank account. A seller with a $5M sale price and a $150K peg shortfall nets the same as a seller with a $4.85M sale price and no shortfall. From the buyer's perspective, the peg is a risk management tool: it makes the seller responsible for delivering a normalized balance sheet, not a stripped one.

The flip side: a seller who delivers above the peg gets a dollar-for-dollar bonus at close. Building the balance sheet up in the months before close — collecting AR aggressively, paying down payables slightly later than usual, timing customer deposits — can add real dollars to net proceeds.

Exit Implications

The peg conversation should start at least 12 months before you go to market, not at the LOI stage. Three concrete actions:

• Calculate your own peg. Pull 12 months of month-end balance sheets, compute working capital each month, average them. That number is what a buyer will propose. If your current working capital is below it, you have time to build up; if it's above it, you have flexibility on close timing.
• Manage AR aggressively. Keep over-90-day AR below 5% of total AR. Anything older gets excluded from the peg, so it's effectively a discount on your proceeds.
• Time your close. If you have any seasonality, the close month materially affects your delivered working capital. A seller in a Q4-heavy business who closes in February will deliver less than the average; one who closes in January will deliver more.

YourExitValue's exit planning dashboard tracks your working capital position month by month so you see your peg trend before any buyer is involved. The owners who build a clean, above-peg balance sheet in the 12 months before close consistently net 1–3% more on their sale than owners who treat working capital as a back-end surprise. On a $5M sale that's $50K–$150K of extra proceeds for work that costs you nothing operationally.