VC & PE Glossary
What Is Working Capital Peg?
Updated
Definition
A working capital peg is the target net working capital level agreed in an M&A deal — the baseline used to calculate post-closing purchase price adjustments.
Useful for: Founders, Investors
A working capital peg is the agreed target for net working capital at transaction close — the reference point for working capital adjustments that true-up purchase price.
How it works
Buyers and sellers negotiate:
- Peg amount — often 12-month average NWC excluding cash/debt-like items per definition schedule
- Collar — sometimes immateriality band where no adjustment unless variance exceeds threshold
- Accounting principles — GAAP consistency, no unusual accrual games pre-close
Example: peg set at $4M NWC. Close at $3.2M → $800K purchase price reduction to buyer (subject to caps). Close at $4.5M → seller may receive $500K add-back if symmetric collar.
Seasonal businesses peg off normalized months — not peak inventory alone. Services firms focus on deferred revenue and unbilled AR treatment.
Locked-box deals fix price at a historical date and pay interest instead of peg adjustments — alternative structure in some UK/EU deals.
Why it matters
- Founders: Run peg forecasts weekly in final quarter of sale. Align AR collection, inventory builds, and AP timing with advisors.
- Investors: PE sponsors model peg in returns — missing peg is equivalent to hidden price increase post-signing.
Common mistake
Negotiating peg using headline NWC without agreeing account definitions — disputes over prepaid marketing or customer deposits blow up at close.
Related ideas
See also working capital adjustment, working capital, and locked box.
Related terms
- Working Capital — Working capital is current assets minus current liabilities — the short-term liquidity buffer a company uses to fund inventory, receivables, and payables in day-to-day operations.
- Working Capital Adjustment — A working capital adjustment is a post-closing purchase price change in M&A when the company's actual net working capital at close differs from the agreed target or peg.
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Common questions
Short answers for founders, LPs, and operators