Key Takeaways
- The working capital peg sets the amount of working capital a buyer expects to receive at closing. If actual working capital lands below the peg, the seller pays the difference. If it lands above, the buyer pays the seller.
- A peg that’s poorly defined, or set using the wrong accounting method, can quietly shift hundreds of thousands of dollars after the deal has already closed.
- Faison Law Group is a boutique transactional firm — no litigation — and builds working capital mechanics into the purchase agreement to prevent post-closing disputes before they start.
- Sellers and buyers need different protections here. Sellers want a peg that reflects a normal, non-inflated month. Buyers want a peg that can’t be gamed in the run-up to closing.
- This article is for informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Faison Law Group.
Why the Working Capital Peg Is the Fight Nobody Sees Coming
Most business owners going through an M&A deal focus on purchase price. That’s the number everyone talks about at the kickoff call, in the LOI, and around the dinner table. But purchase price isn’t what actually shows up in your bank account. The working capital peg is.
Here’s the mechanic: the buyer isn’t just paying for your business, they’re paying for a business that comes with enough cash, receivables, and inventory (minus payables) to run itself on day one, without them injecting new capital. That’s working capital. The peg is the number both sides agree that working capital needs to hit at closing.
If your actual working capital comes in under the peg, that shortfall gets deducted from your purchase price, dollar for dollar. If it comes in over, you get a check for the difference. Sounds simple. It rarely is.
This section and all content below offers general information only and is not legal, tax, or investment advice. Outcomes depend on individual facts and circumstances, and you should consult qualified counsel for guidance specific to your situation.
Where Deals Actually Go Wrong
The working capital peg looks like a math problem. In practice, it’s a drafting problem, and small wording choices move real money.
- The peg is set on the wrong baseline. A seasonal business — landscaping, retail, anything with a slow season — can get pegged using a month that doesn’t represent its normal cash needs.
- “Normalized” working capital isn’t actually normalized. Buyers and sellers often use different accounting treatments for the same line items — deferred revenue, accrued bonuses, prepaid expenses. Without a clearly defined calculation methodology in the purchase agreement, both sides can walk into closing with a completely different number in mind.
- There’s no independent tiebreaker. If the buyer’s post-closing calculation and the seller’s don’t match, and the agreement doesn’t name a neutral accountant to resolve it, you’re negotiating from a position of exhaustion instead of leverage, right after the deal you spent a year building finally closed.
- Sellers manipulate the run-up. Delaying payables, accelerating collections, or cutting inventory in the weeks before closing can artificially inflate working capital right when it’s measured, a favorite move sellers use to squeeze extra dollars out of an unprotected buyer.
What Good Drafting Actually Looks Like
| Mechanism | What It Does |
|---|---|
| Defined calculation methodology | Locks in exactly which accounting principles and line items apply, so “working capital” means the same thing to both sides |
| Peg based on a trailing average | Prevents a single unusually strong or weak month from distorting the number |
| Independent accountant tiebreaker | Names a neutral third party to resolve disputes over the post-closing calculation, instead of leaving it to negotiation or litigation |
| True-up mechanism and timeline | Sets a clear window (typically 60–90 days post-closing) for calculating actual working capital and settling the difference |
| Anti-manipulation covenants | Restricts the seller from changing normal payment or collection practices in the period before closing |
A working capital peg that’s actually protective isn’t complicated language, it’s precise language.
That precision is where a transactional attorney earns their keep: not by making the deal harder to close, but by making sure the number you agreed to is the number you get.
Faison Law Group’s Approach
We don’t do litigation, and we structure working capital mechanics so you never need to. That means clean definitions up front, a fair and specific true-up process, and a dispute mechanism that doesn’t depend on anyone suing anyone. Whether you’re the buyer trying to protect the deal you underwrote, or the seller trying to make sure a “normal” month doesn’t get redefined against you after the fact, this is exactly the kind of provision where a few extra hours of drafting saves months of disagreement later.
Related Resource
Watch: LOIs & Asset Pegs: Protect Your Deal! — James and Charles Lyons break down how the related “Asset Peg” protects a buyer’s investment if a company’s assets shift before closing, the same logic that drives working capital pegs.
Frequently Asked Questions
Is the working capital peg negotiable?
Yes. It’s one of the most heavily negotiated numbers in a deal, precisely because it directly affects what lands in your account. The methodology behind itis where the real negotiation happens.
What happens if the buyer and seller can’t agree on the post-closing calculation?
That’s exactly why the purchase agreement should name an independent accountant as a tiebreaker up front. Without one, disagreements get expensive and slow to resolve.
Does a working capital peg apply to every M&A deal?
It’s most common in deals where the buyer is acquiring the business as a going concern and needs it to keep operating without an immediate cash infusion. In deals under $1MM it is oftentimes not included.
How long does the true-up process usually take?
Most agreements set a 60- to 90-day window after closing to finalize the calculation and settle any difference, though this is negotiable based on deal complexity.
Working through a working capital peg on your own deal? Schedule a free 15-minute consultation with Faison Law Group. Call (667) 423-5625 or contact us online.
This article is for informational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship with Faison Law Group or any of its attorneys.