Working Capital Peg
The agreed amount of working capital that must be left in the business at closing so operations continue, with any shortfall or surplus adjusting the final purchase price.
What the Peg Is
When a business changes hands, the buyer needs enough cash, receivables, and inventory to keep running the day after closing: to pay suppliers, make payroll, and fund the gap before customers pay. The working capital peg is the target level both sides agree the company should carry at close. If the company delivers less than the peg, the price drops by the shortfall. If it delivers more, the seller is paid for the surplus. The headline price quoted in a letter of intent is rarely the final wire amount, because the peg trues it up.
As McDannell describes it, working capital is:
"Cash left in the business at sale (often 1-2 months of expenses) so operations continue; negotiable and can adjust purchase price."
McDannell, Get Acquired, ch. 6
The two halves of that definition matter equally. The peg keeps the lights on, and it is a price lever, not a fixed line item.
How It Is Calculated
The peg is built from the components of net working capital, the current assets that fund operations minus the current obligations against them. Warrillow lays out the formula directly:
"Formula (receivables + finished-goods inventory − payables, accrued expenses, short-term liabilities) determining adjustments at close."
Warrillow, The Art of Selling Your Business, ch. 12
In practice the parties look at the trailing twelve months, average the company's normal working capital over that period, and set the peg near that average. Setting it off a normalized average matters: a single month chosen at the seasonal peak or trough would hand a windfall to one side. At close, actual working capital is measured against the peg, and the difference becomes a dollar-for-dollar adjustment to the price.
Why It Becomes a Negotiation
Because the peg moves real money, it is one of the quieter places a deal can be re-traded. A buyer who sets the peg high effectively forces the seller to leave more cash behind for the same price. McDannell's framing, that the figure is negotiable and adjusts the purchase price, is the warning: a seller who treats the peg as a clerical detail can give back value won at the headline number.
Two defenses follow. First, settle the peg's definition and target in the LOI rather than discovering it during diligence, when leverage has already shifted. Second, watch the components. Whether finished-goods inventory is counted at cost, how stale receivables are treated, and what counts as a short-term liability all swing the number. The seller wants the peg to reflect how the business actually runs, not a buyer's worst-case reading of the balance sheet.
Relation to Net Proceeds
The peg sits alongside the other mechanics that separate a quoted price from cash in hand: escrow holdbacks, seller financing, and the question of whether the seller "zeroes out the balance sheet" by sweeping excess cash before close. An owner running a want-number-versus-need-number calculation should model the peg as a real reduction to proceeds, not assume the full LOI figure lands. Treated carefully, the peg is fair to both sides. Treated carelessly, it is a discount the seller agreed to without noticing.
Further Reading
Sources: McDannell, Get Acquired ch.6; Warrillow, The Art of Selling Your Business ch.12