What Is Working Capital in a Business Sale?

What It Is

Working capital in a business sale is the cash buffer the buyer expects to receive at closing so the business can operate on day one without injecting their own money. Specifically, it's the difference between current operating assets (accounts receivable, inventory, prepaids) and current operating liabilities (accounts payable, accrued expenses, deferred revenue) — calculated using a trailing twelve-month average to smooth out monthly swings.

The number the buyer sets as their expectation is called the working capital peg, or simply "the peg." Every letter of intent for a lower middle market business includes a working capital peg, and every business valuation you do should already account for it. Owners who learn what the peg is for the first time at the LOI stage usually leave $200K–$600K on the table.

Why It Matters

The peg matters because it directly reduces the cash you walk away with at closing. If the buyer's peg is $500K and you only deliver $400K of working capital, the purchase price drops by $100K — dollar for dollar, no negotiation. Most owners assume the cash in their bank account at closing belongs to them. In an asset sale that's typically true, but the buyer wants the accounts receivable, inventory, and operating accruals to come with the business — and they're going to net those against payables to get to the peg number.

Three reasons the peg becomes a major surprise late in a deal:

• Seasonality. Service businesses that bill heavily in Q4 or Q1 might show $700K of working capital at one point and $300K at another. The trailing twelve-month average peg might land at $500K, but if you close in a low month you'll deliver short and absorb the shortfall.
• Deferred revenue. If you collect cash upfront for services you haven't yet delivered (annual maintenance contracts, prepaid retainers, deposits), that cash sits on the balance sheet as a liability — and the peg includes it. You'll deliver less net working capital than you think.
• Slow AR. Receivables over 90 days are typically excluded from peg calculations because buyers don't want to underwrite collection risk. If 15% of your AR is over 90 days, that's directly removed from your delivered working capital.

How to Use It

Three actions to take well before going to market:

• Calculate your own peg. Pull your last 12 months of balance sheets, compute (current operating assets) minus (current operating liabilities) at the end of each month, average those 12 values. That's the number a buyer will likely propose. Comparing your current actual to that average tells you whether you're "above peg" (delivering more than required = bonus to your proceeds) or "below peg" (penalty).
• Time your close intelligently. If your business is seasonal, closing in a month when actual working capital exceeds the trailing average means more cash in your pocket. If you can choose the close date, push for the high-WC month.
• Clean up old receivables. Anything over 90 days is going to be excluded from the peg calculation. Collect or write off old AR before the buyer's quality of earnings team starts pulling balance sheets, so the AR number that ends up in the peg is your real collectable AR.

YourExitValue tracks your working capital position over time inside the exit planning dashboard so you know your peg number 6, 12, and 24 months before close — not for the first time when the buyer hands you a term sheet. The owners who get this right walk away with the full enterprise value. The ones who don't usually find out at closing they're $300K short.