You have agreed on a headline price for your business, shaken hands, and signed a letter of intent. Then the buyer’s term sheet mentions a working capital peg, and suddenly the cash you actually walk away with at closing is in play again. For many Southern California owners, this single mechanism is the most misunderstood part of a deal — and the one that quietly moves real money at the closing table.
A working capital peg is the agreed-upon “normal” level of working capital you must leave in the business when you hand over the keys. Understand it early and you protect your proceeds; ignore it and you can lose a six-figure chunk of your sale price in the final true-up. This guide explains what the peg is, how it is calculated, and how to negotiate it so it does not erode the value of a $1M–$5M EBITDA company selling in the $3M–$25M range.
What a Working Capital Peg Actually Is
Most lower-middle-market deals are structured on a cash-free, debt-free basis. That means you keep the cash in the bank and pay off your debt at closing, while the buyer receives the operating engine of the business. But that engine cannot run on fumes — it needs a baseline of receivables, inventory, and payables to keep operating from day one. The working capital peg is the dollar amount of that baseline.
Why buyers insist on a peg
A buyer is paying a multiple of adjusted EBITDA for a business that can operate without an emergency cash injection on the first morning of ownership. If you stripped out all the receivables and let payables balloon right before closing, the buyer would have to fund operations out of pocket. The peg protects the buyer from a depleted business — and, just as importantly, protects you from being accused of one if you have left a normal amount behind.
What counts as working capital
For these purposes, net working capital is generally current operating assets minus current operating liabilities — typically accounts receivable plus inventory, minus accounts payable and accrued liabilities. Cash and interest-bearing debt are excluded because they are handled separately in a cash-free, debt-free structure. The U.S. Securities and Exchange Commission uses the same current-asset and current-liability building blocks in its financial reporting framework, so the categories will be familiar to any accountant on the deal.
How the Peg Is Set and Trued Up at Closing
The mechanics of a working capital peg come down to two steps: setting the target, then comparing what you actually deliver against it.
Setting the target from a trailing average
The peg is usually based on a trailing twelve-month average of your net working capital, sometimes adjusted for seasonality. This is where preparation pays off: if your trailing average is distorted by an unusual quarter, you want that on the table before the number is locked. A buyer’s accountant will build the peg from your historical balance sheets, so clean, consistent financials directly shape the figure.
The true-up: delivering above or below the peg
At closing, your actual net working capital is measured. Deliver more than the peg and the buyer pays you the difference; deliver less and your proceeds are reduced dollar-for-dollar. This adjustment is not a penalty — it simply settles the gap between the normal level you both agreed to and what was actually in the business on the closing date. Understanding the cash you net after this and other deal terms is exactly why it pays to model your numbers early, and to compare them against what a brokered sale would have cost you using our Broker Fee Savings Estimator.
A Worked Example of the Closing-Cash Impact
Net working capital delivered versus the peg
Suppose you own a distribution business in the Inland Empire selling for a $12,000,000 enterprise value, with a negotiated working capital peg of $1,200,000. Here is the net working capital you actually deliver at closing.
| Working Capital Component | Amount |
|---|---|
| Accounts receivable | $900,000 |
| + Inventory | $600,000 |
| ? Accounts payable | ($350,000) |
| ? Accrued liabilities | ($100,000) |
| = Net working capital delivered | $1,050,000 |
| Less: working capital peg | ($1,200,000) |
| Shortfall below peg | ($150,000) |
| Adjusted cash to seller at close | $11,850,000 |
Your receivables and inventory of $1,500,000 minus payables and accruals of $450,000 leave $1,050,000 of net working capital delivered. Because the peg was $1,200,000, you are $150,000 short, and the purchase price is reduced from $12,000,000 to $11,850,000. Had you collected on aging receivables and delivered $1,200,000 instead, that $150,000 would have stayed in your pocket.
Wondering what you’d actually net at close?
Start with a realistic enterprise value using our Business Valuation Calculator, then call us to walk through how the working capital peg would apply to your specific balance sheet.
How to Negotiate the Peg in Your Favor
The working capital peg is negotiable, and a few disciplined moves protect the cash you take home.
Account for seasonality and California-specific swings
If your business has seasonal peaks — a Southern California food and beverage co-packer ramping for the holidays, or an HVAC service fleet busiest in the Los Angeles summer — a flat trailing-twelve-month average can misrepresent your normal needs. Push for a peg that reflects the season in which you actually close. California’s high inventory carrying costs and the lag in collecting from large institutional customers can also distort a single snapshot, so the measurement window matters.
Define the calculation precisely
Most working capital disputes are really definitional. Agree in writing on exactly which accounts are included, the accounting methods used, and how items like prepaid expenses or deferred revenue are treated. According to general guidance from the U.S. Small Business Administration, clarity in the purchase agreement is one of the strongest protections a seller has, and the peg definition is a prime example.
Why a direct deal keeps the peg honest
When you sell to a single funded buyer instead of running an auction, the peg is negotiated directly with the decision-maker and built around your real operating cycle. There is no committee re-opening the calculation at the eleventh hour and no broker incentive to paper over a definition you will pay for later. That transparency is part of why a direct, private process tends to produce fewer last-minute surprises at the closing table.
Protect Your Closing Cash Before You Sign
The working capital peg can swing your proceeds by six figures, so the time to understand it is before it appears in a term sheet. Begin by anchoring your expectations with our Business Valuation Calculator, then reach us for a confidential 15-minute conversation at (949) 393-0098 or through our contact page. As a direct buyer backed by an established private equity firm, BizSellDirect negotiates working capital transparently and directly with you — no brokers, no commissions, and no public listing of your business.
