Working Capital Peg

Working capital peg is the agreed target for operating current assets and liabilities that a seller delivers with a business at closing.

Why a working capital peg matters to an owner considering a sale

A buyer needs more than a history of earnings. The business also needs ordinary operating resources after ownership changes. Uncollected customer bills, stock needed to fill orders, and bills owed to suppliers affect whether operations can continue in a familiar pattern. The peg gives the parties a way to discuss what is expected to transfer with the business. It does not determine whether the buyer has enough financing for every future need.

Sell My Small Business is an independent publication partnered with SMB Investor Network. Investors on that network buy small businesses and may be buyers of yours. This page explains a sale term for owners considering a sale; it is not an offer or a suggested term for your business.

Guests on The SMB Investor podcast connect the peg to operating continuity. One explains that delaying bill payments or collecting receivables aggressively before closing can leave a buyer with a different operating balance sheet than expected. Another points to inventory: if stock lets a company fill orders promptly, reducing it can affect service after closing. The buyer's question is what resources the business needs to keep doing what its earnings history describes.

How the term is used

The parties first define which operating assets and liabilities belong in the closing calculation and how they will be measured. Receivables, inventory, and ordinary payables may be relevant, but the treatment depends on the agreed terms and the business's operating pattern. They then compare what is delivered at closing with the agreed target. A difference can lead to an adjustment under the agreement. The peg concerns delivered operating resources; arranging additional cash to run the company after closing is a separate question.

Illustrative example: A distributor normally keeps 100 boxes of a standard product ready for customer orders. At closing it has 40 boxes, while open orders still call for regular shipment. These round counts are illustrative and are not a peg, formula, or recommended inventory target. They show why a buyer would ask whether the stock delivered with the business can support normal service. The same discussion would also consider collectible customer bills and amounts due to suppliers under the actual agreement.

Common mistakes

Treating the peg as a technical adjustment with no operating consequence can hide the reason it exists. A low stock balance may have a different effect in a distributor than in a service firm. Likewise, a receivable's face amount says little if collection is uncertain.

Another mistake is discussing the target without agreeing on definitions, timing, and the records used at closing. An owner may think a customer payment or supplier bill belongs to one period while the buyer assigns it to another. Those differences need to be identified in the sale documents. This page describes the questions, not the right target or contract language for a particular sale.

Related terms

Accounts receivable covers customer amounts still owed. Inventory at close concerns stock delivered with the business. Read working capital in a business sale for the wider continuity question.

Sources

The SMB Investor podcast.