Published: | Last reviewed: November 2026 by Jeff Judge, CFP®
Part of our guide: How do you plan your business exit and protect what you’ve built?
A working capital peg can raise or lower your business sale price dollar for dollar, because it sets the amount of short-term operating assets a buyer expects the company to hand over on closing day. The peg is the agreed "normal" level of net working capital, mostly receivables and inventory minus payables, and if the business delivers less than the peg, the shortfall comes out of your proceeds. It is one of the least discussed lines in a letter of intent and one of the costlier ones to overlook.
Key Takeaways
- Working capital adjustments now appear in more than 90% of private-target deals, up from roughly 50% a decade ago.
- The peg is the agreed normal level of working capital, and delivering less at closing reduces your price dollar for dollar.
- Ordinary pre-sale habits, like collecting receivables early or slowing inventory purchases, can shrink working capital and cost you real money at closing.
- Maryland's state income tax rate reaches 6.5% at upper incomes, so plan around net proceeds, not the headline price.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate business sales and exits since earning his CFP® certification in 2013, by using Chesapeake's signature process, the R.U.D.D.E.R. Method™. "Owners negotiate the headline price for months and the working capital definition for an afternoon, and I would flip that," Jeff says.
What Is a Working Capital Peg in a Business Sale?
A working capital peg is the target amount of net working capital that buyer and seller agree the business needs to run normally at closing. Net working capital is current assets such as receivables and inventory, minus current liabilities such as payables and accrued expenses. The bank balance and debt are settled separately. This purchase price adjustment moves the price up or down by the gap between the peg and what the business actually delivers.
Why does a buyer care? Because they are paying for a business that works on day one: customers who owe money that will arrive, shelves stocked for incoming orders, vendor bills due but not overdue. The protection is now close to universal. The SRS Acquiom 2026 working capital study, covering more than 1,500 private-target acquisitions, found these adjustments in more than 90% of deals, up from about 50% a decade ago.
In many letters of intent, one sentence after the headline price says the price assumes a normalized level of working capital. That single line can shift what you collect at closing by hundreds of thousands of dollars.
Here is a hypothetical example, not a real client. A buyer agrees to pay $8 million for a distribution business with a peg of $1.2 million.
| Scenario | Peg | Delivered at closing | Effect on price |
|---|---|---|---|
| Shortfall | $1,200,000 | $950,000 | Price falls by $250,000 |
| Surplus | $1,200,000 | $1,350,000 | Price may rise by $150,000 |
The business is worth the same in both rows; only the delivered working capital differs, and the buyer received less than the deal assumed in the first.
Can a working capital adjustment help the seller? Yes. If you deliver more than the peg, many agreements raise the price by the difference. Some buyers, though, propose caps on upward adjustments while leaving downward adjustments uncapped. That asymmetry is negotiable, and it is easy to miss in an eighty-page draft.
There is also a second measurement. Closing numbers are estimates, so purchase agreements commonly include a true-up a few months later, once the books are final. That is when many sellers get the surprise.
How Do Sellers Lose Money on the Working Capital Adjustment?
Sellers most often lose money on the working capital adjustment in one of two ways: they accept a peg built on unusual numbers, or they change how they run the business in the final months before closing. A fair peg is fair to both sides; the trouble starts when an owner agrees to a number without knowing how it was built.
- The peg is set during a peak. If the trailing twelve months included an unusually strong quarter, the average runs higher than the business normally carries, and the peg becomes hard to hit.
- Seasonality gets ignored. A landscaper, a retailer, or a manufacturer with a heavy spring season sees working capital swing month to month. Closing in a slow month against a full-year average can produce a shortfall unrelated to how well the business is run.
- Inventory gets run down. Owners who slow purchasing to conserve funds lower working capital, and the price adjusts accordingly.
- The definitions do not match the books. If the agreement uses accounting policies that differ from your historical records, the closing number can come in low even though nothing changed operationally.
- Growth gets measured backward. A fast-growing business needs more working capital each month, so a trailing-average peg can look modest next to today's needs. Some buyers push for a forward-looking peg built on projected sales. Neither approach is wrong, but it is a negotiation point, not a formula.
Why does collecting receivables early backfire? It sounds prudent. You push customers to pay so the books look clean before a buyer's accountants arrive. But a collected receivable becomes money in the bank, and in most deal structures the bank balance is excluded from the calculation or swept to the seller separately. Receivables fall, working capital falls, and the adjustment takes back money you thought you had won.
"The headline price is what you negotiate. The working capital mechanics decide what you actually keep." (Jeff Judge, CFP®)
When Is the Working Capital Peg Negotiated, and What Should You Ask For?
The working capital peg is most often negotiated in the letter of intent or the early purchase agreement drafts, when the owner is still focused on price, terms, and whether they will stay on after the sale. By the time the true-up arrives, the methodology is locked. You can dispute the calculation, and most agreements send disputes to an independent accountant, but you cannot easily reopen the peg itself.
Consider another hypothetical. A heating and cooling company agrees to sell for $6 million with a peg set at the trailing twelve-month average, about $900,000. The deal closes in late February after a mild winter, with receivables light and parts inventory kept lean ahead of the spring rush. Working capital at closing comes in near $700,000, so the price drops by $200,000. Three months later the true-up finds accrued expenses nobody captured, and another $40,000 moves to the buyer from escrow. The owner ran the business well but closed at a seasonal low against an annual average. A peg adjusted for the closing month, or a closing date moved by a few weeks, could have changed the result.
Raise these points early:
| Point to negotiate | What to ask | Why it matters |
|---|---|---|
| How the peg is calculated | Request the monthly figures behind it. Is it a twelve-month average, adjusted for seasonality, with unusual months excluded? | The method decides whether the number is reachable |
| A collar | Ask for a band around the peg so small swings trigger no adjustment | Cuts disputes over minor differences |
| What is in and out | Name the accounts. Customer deposits, deferred revenue, accrued bonuses, and tax liabilities cause the most disagreement | Vague definitions invite disputes at the true-up |
| How the true-up works | Learn how long the buyer has to prepare the closing statement, how long you have to review it, and whether escrow secures it | Determines when your money is released |
A related term works on the same principle. We cover it in our post on how an earnout clause can cut your business sale price. An earnout depends on what happens after closing, while the peg depends on a baseline agreed before it. Both reward the owner who understood the term before signing.
How Should Owners Prepare for the Working Capital Peg Before a Sale?
Owners should start tracking working capital monthly at least a year before a sale, clean up the balance sheet, and model any operational change before making it. Our guide on how to prepare your business for a strong sale covers the wider checklist.
- Track your own normal range. Know your monthly working capital before a buyer's analysts tell you what it is.
- Consider a sell-side quality of earnings review. It is an independent look at your financials, prepared for you instead of the buyer, and it gives you a defensible working capital analysis to bring to the table.
- Clean the balance sheet early. Uncollectible receivables, stale inventory, and unbooked accruals tend to surface in diligence. Find them first and you control how they are explained.
- Model before you change anything. If you plan to push collections, slow purchasing, or pay down payables, test the effect on working capital first. Some of those moves still make sense, and others shift money to the buyer.
The R.U.D.D.E.R. Method™ is Chesapeake Financial Planners' six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. The first two steps are where we ask for twelve months of balance sheets, because you cannot negotiate a peg you have not measured.
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How Does the Peg Change Your Maryland Taxes and Retirement Plan?
Every dollar the peg adds or removes flows into your tax bill, your retirement income plan, and what you can give to family. Even a $250,000 swing changes what you can spend, give, and invest afterward.
Maryland adds its own layer. The state's income tax rate reaches 6.5% on taxable income above $1 million for single filers and $1.2 million for joint filers, and the Comptroller reports an additional 2% tax on net capital gains for individuals with federal adjusted gross income over $350,000, subject to exceptions. Counties may also impose local income tax of up to 3.30%. A downward adjustment tends to lower the gain you report, but it only returns the tax that dollar would have produced, so you still end up behind. Ask your CPA how a post-closing adjustment lands in the tax year, and read our post on selling a business in Maryland for the state layer.
Timing matters too. If part of the price sits in escrow until the true-up is final, that money is not available on closing day. We would rather build a post-sale plan around the proceeds you can count on now than commit to a home purchase, a gift to children, or an investment plan based on a number that might shrink. Our post on why sale structure gets set before your advisor joins covers the same timing problem, and the full framework sits in our business exit planning roadmap.
From our office in Forest Hill, we work with business owners across Harford County and northern Baltimore County, where seasonal trades such as contracting and landscaping are common. A slow-month closing measured against a full-year peg can create a shortfall on its own, so seasonality deserves extra attention for any of them. When we ask owners what working capital their business normally carries, many cannot answer right away, even owners who know every other number cold.
Frequently Asked Questions
What is a working capital peg?
A working capital peg, sometimes called a net working capital peg, is the target level of net working capital a buyer and seller agree the business should deliver at closing. It is built from receivables and inventory minus payables and accrued expenses. If the business delivers less than the peg, the price falls by the difference, and if it delivers more, the price may rise.
How is a working capital peg calculated?
A working capital peg is commonly calculated as the average of monthly net working capital over the trailing twelve months. Parties can adjust that average for seasonality, exclude unusual months, or base the peg on projected sales for a growing company. Because the method is negotiated, ask to see the monthly numbers behind any proposed peg.
What happens if working capital at closing is below the peg?
If working capital at closing is below the peg, the purchase price is reduced by the shortfall, dollar for dollar in many agreements. The buyer recovers it at closing or through a later true-up, sometimes from escrow. You can dispute the calculation afterward, often before an independent accountant, but the peg itself is hard to reopen.
Is a higher or lower working capital peg better for the seller?
A lower peg tends to favor the seller because the business has less to deliver before the price drops, while a buyer tends to prefer a higher one. A fair peg reflects what the business needs to operate. A peg set too high, such as one built on a peak quarter, works like a hidden price cut.
What is a working capital true-up?
A working capital true-up is the post-closing process that replaces estimated closing numbers with final ones. Several months after closing, the books are finalized and actual working capital is compared with the peg. Money then moves between buyer and seller, often from escrow. Negotiate the review timeline and dispute process before you sign.
Who should review the working capital peg before I sign a letter of intent?
Your CPA, an attorney experienced in M&A, and your financial planner should each review the peg before you sign. The CPA checks how working capital is defined and calculated, the attorney checks the purchase agreement language, and the planner tests what the resulting net proceeds mean for your retirement plan and goals.
Ready to Test Your Working Capital Peg Before a Buyer Does?
If you are within a few years of selling, answer one question before you sign a letter of intent: what working capital does your business normally carry, month by month, and how would a buyer likely set the peg? Jeff Judge and the Chesapeake team serve families and business owners across Harford County and the Baltimore metro area, and we are glad to work through that analysis alongside your CPA and M&A attorney well before a buyer is at the table. Schedule a free fit call with Jeff to see where your working capital peg could change your picture.
A version of this article was originally published on Chesapeake Financial Planners' LinkedIn.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
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