Working capital in a business sale
It's the line item that quietly decides how much money actually lands in your account. Most owners don't think about working capital until a buyer hands them a target, and by then it's already moving the price. Here's what the peg is, how the true-up works, and how to keep it from costing you.
What working capital actually is
Working capital is the short-term money a business needs to keep the lights on between paying its bills and getting paid by its customers. In accounting terms it's your current assets minus your current liabilities. The current assets that matter most in a sale are accounts receivable (money customers owe you) and inventory. The current liabilities are things like accounts payable (money you owe suppliers) and accrued expenses such as wages you've earned but not yet paid out.
Net it all together and you get net working capital. A positive number means the business carries a cushion of short-term assets over short-term obligations. That cushion is what lets the company make payroll, restock, and cover supplier invoices without anyone reaching into their own pocket.
Why buyers require a "normal" level to transfer
Here's the part that catches sellers off guard. When a buyer agrees to a price, they're paying for a business that can run on its own from the first morning they own it. They are not signing up to immediately wire in extra cash just to keep operations moving. So the deal assumes a normal amount of working capital comes along with the business, already inside it, at close.
That normal amount gets written into the deal as a target. People call it the peg, or the working capital target. The peg is usually set from a trailing average of your actual working capital, often the last twelve months, so seasonal swings get smoothed out instead of one odd month setting the bar. The logic is simple: a buyer wants to inherit roughly the same operating cushion the business has been carrying all along.
If you strip the business of receivables and cash on your way out the door, the buyer would have to refill the tank themselves. The peg stops that. It says: leave behind about this much, and the price holds.
How the true-up adjustment works at close
Working capital is a moving target right up to the closing date. Receivables get collected, new invoices go out, inventory turns. Nobody knows the exact figure on the day you sign, so deals handle it in two steps.
- At close, the parties use an estimated working capital figure to set the price that day.
- After close, usually within sixty to ninety days, they calculate the actual working capital as of the closing date and compare it to the peg. That comparison is the true-up.
The math is straightforward once you see it. If actual working capital came in above the peg, you left more in the business than required, so the buyer pays you the difference. If it came in below the peg, you left too little, so you refund the buyer the shortfall. The adjustment is dollar for dollar, and it's a real cash transfer that happens after you thought the deal was done.
A simple example
Say the peg is set at $500,000, based on your trailing average. Two things can happen at the true-up:
| Scenario | Actual at close | Result |
|---|---|---|
| You left extra in the business | $560,000 | Buyer pays you $60,000 |
| You delivered the target | $500,000 | No adjustment |
| You left too little | $430,000 | You refund $70,000 |
Illustrative figures to show the mechanics, not a real deal. Your actual peg, lookback period, and which accounts count are all negotiated and defined in the agreement.
Why it's one of the most negotiated and misunderstood items
Working capital gets fought over because there's no single standard for setting it, and small choices move real money. The size of the peg is negotiable. The lookback period used to build it is negotiable. Which accounts get counted, how seasonality is handled, whether deferred revenue or prepaid items belong in the calculation, how cash and debt are treated separately under the deal structure: all of it is on the table.
A peg set even modestly higher than what's fair means you, the seller, are funding more of the business out of your own proceeds. A peg set lower works in your favor. Buyers know this, which is why their first proposed target often runs high. The methodology matters as much as the number, because a vaguely worded calculation can turn into a dispute months after closing when the true-up gets run.
The misunderstanding part is just as costly. Plenty of owners agree to a headline price, celebrate, and then watch a chunk of it claw back at the true-up because they never modeled how the peg would land. It's not a trick. It's a standard mechanic. But if you don't understand it going in, it feels like one.
How much it can move your proceeds
On a lower-middle-market deal, the working capital adjustment can swing the final number by a meaningful amount relative to your take-home, not a rounding error. The exact size depends on how working-capital-intensive your business is. A company with large receivables and heavy inventory has a bigger, more volatile working capital base, so the peg carries more weight and there's more room for the true-up to move. A lean service business with little inventory has a smaller base and a smaller swing.
The point isn't to memorize a percentage. It's to treat the peg as part of the price, because it is. Two offers with the same headline number can leave you with materially different proceeds once their working capital targets are factored in.
How to prepare
You can take a lot of the surprise out of this before you ever go to market.
- Build a monthly working capital history. Pull your current assets and current liabilities month by month so you can see how the number moves through the year, especially around your busy season. This is the data the peg gets built from, so you want to own the narrative.
- Clean up what's stale. Collect aging receivables and clear out obsolete inventory before diligence. Dead accounts and unsellable stock inflate your working capital on paper without giving a buyer anything real.
- Understand your seasonality. If your working capital peaks in one quarter and dips in another, the lookback period and timing of close can change the peg. Knowing your own pattern lets you push for a fair basis.
- Tie it to your other diligence prep. A clean quality of earnings report and a well-drafted business sale agreement are where the working capital methodology actually gets pinned down. Loose definitions here are what cause post-close fights.
Above all, don't negotiate the peg alone. This is squarely advisor and accountant territory. A good M&A advisor negotiates the methodology, models how each proposed target hits your net proceeds, and makes sure the calculation is defined precisely enough that the true-up is arithmetic, not an argument. Your accountant builds the supporting numbers and stress-tests the buyer's assumptions. Owners who go in without that help tend to give up money they didn't know was on the table.
Where ProCloser fits
The working capital peg is one of many deal terms where having the right advisor in your corner pays for itself. The hard part is finding a firm that actually closes deals your size and knows how to push back on an aggressive target. That's what we built ProCloser to solve. Tell us about your business and we match you with vetted M&A advisory firms, including no-retainer, success-only options, free to sellers.
New to the process? Start with the broader guide to selling your business, and if you're still sorting out who you'd even work with, our breakdown of a business broker versus an M&A advisor is a good next read. When you're ready, get matched.
Working capital FAQ
What is working capital in a business sale?
It's the short-term money the business needs to operate: current assets like accounts receivable and inventory, minus current liabilities like accounts payable and accrued expenses. In a sale, a normal level of working capital is expected to transfer with the business so the buyer can run it from day one. That normal level is set as a target called the peg.
What is a net working capital peg?
The peg is the agreed target level of net working capital you must leave in the business at close. It's usually built from a trailing average of your actual working capital, often the last twelve months, to smooth out seasonal swings. Deliver more than the peg and you're typically paid for the excess; deliver less and the price is reduced.
How does the working capital adjustment work?
At close, an estimated figure sets the price. After close, usually within sixty to ninety days, the parties calculate actual working capital as of the closing date and compare it to the peg. That's the true-up. Above the peg, the buyer pays you the difference. Below it, you refund the buyer. It's a dollar-for-dollar cash settlement.
Why is working capital so heavily negotiated?
Because it moves real money and there's no fixed standard. The peg size, the lookback period, which accounts count, and how items like deferred revenue and cash are treated all affect your proceeds. A target set even modestly high means you fund more of the business yourself. Both sides have a reason to push, so the methodology gets negotiated line by line.
How do I prepare for the working capital negotiation?
Build a monthly history of your current assets and liabilities, clean up stale receivables and obsolete inventory, and understand your seasonality before going to market. Then bring in an M&A advisor and an accountant early to negotiate the methodology and model how the peg affects your net proceeds.
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Tania leads ProCloser's network of vetted M&A advisory firms and works with business owners every week on valuation, deal terms, and getting matched to the right advisor to sell. Get matched free.