What is working capital in a business sale (the working capital peg)?

Working capital is the cash cushion a business needs to keep running day to day — paying suppliers and staff while it waits to collect from customers. In simple terms it's current assets (like accounts receivable and inventory) minus current liabilities (like accounts payable). In most M&A deals it is calculated 'cash-free, debt-free,' meaning the seller keeps the cash on hand and pays off debt, and the buyer focuses on the operating working capital that comes with the business.

Buyers price a company assuming it arrives with enough working capital to operate without an immediate cash injection. To pin that down, the parties agree on a 'peg' (also called the target) — a normal level of working capital, usually based on a trailing average over the prior 6-12 months to smooth out seasonal swings. The peg is negotiated in the LOI or purchase agreement and becomes the benchmark the deal is measured against.

At closing, the actual working capital is compared to the peg, and the difference becomes a dollar-for-dollar adjustment to the price — typically trued up a few months after closing once final numbers are known. If you deliver less working capital than the peg, the purchase price drops by the shortfall; if you deliver more, you're credited for the excess. This is real money, not a technicality, and a low versus high peg can swing your net proceeds meaningfully.

Two things protect sellers here. First, negotiate the peg methodology carefully — how it's defined, which accounts are included, and over what period — because a buyer setting a high peg effectively asks you to leave more value behind. Second, don't try to game it by draining receivables, delaying payables, or running down inventory before close; buyers and their quality-of-earnings teams normalize for exactly that. Model the peg with your CPA or M&A advisor. DealSeam is not a traditional business broker; where there's a fit, it introduces owners to qualified buyers, and the buyer pays the success fee, so sellers pay nothing.