Working capital target peg

What it is

The working capital peg is the negotiated target amount of working capital — cash, receivables, and inventory, net of payables — the seller commits to leave in the business at closing. It's typically set against a trailing average of the business's own historical working capital, so it reflects what the business normally needs to run, not an arbitrary number.

It shows up in the purchase agreement as a true-up mechanism: if the working capital actually delivered at closing comes in above the peg, the buyer pays the seller the difference; if it comes in below, the seller pays the buyer. That reconciliation usually happens on a short delay after closing, once final numbers are in.

Why it matters

Without a clearly negotiated peg, a seller can legally collect outstanding receivables, run down inventory, and delay paying vendors in the weeks before closing — leaving a technically "clean" business that the new owner has to fund out of pocket just to keep the lights on day one.

It's also one of the most common sources of post-closing disputes in small business M&A, precisely because it's easy to leave vague in an LOI (letter of intent) and painful to fight about after the fact. Getting the definition and the calculation method in writing early is cheap insurance against a much more expensive argument later.

What to look for

• No working capital target mentioned anywhere in the deal materials or LOI yet
• Historical working capital that swings widely, making a single "normal" level hard to define
• Seasonal businesses where the peg needs to reflect the specific time of year at closing, not an annual average
• Whether the peg is based on a trailing average or a single point-in-time snapshot the seller could manipulate