Working Capital Pegs: How They Are Set and How They Change the Price

A working capital peg is the target level of net working capital the seller has to deliver at closing, and the price moves dollar for dollar when the closing balance misses it. The peg exists because you are buying a business that runs, not a shell. A shop with no receivables, no inventory, and a pile of unpaid vendor bills cannot run on day one, no matter what the earnings say.

Net working capital here means the operating current assets minus the operating current liabilities. On the asset side that is receivables, inventory, and prepaid items. On the liability side it is trade payables, accrued payroll and vacation, and customer deposits. Cash, loans, owner advances, and income taxes sit outside the definition. That is the cash-free, debt-free structure: the seller keeps the cash and pays off the debt, and the price assumes a normal level of working capital stays behind.

The mechanics run in a fixed order:

1. The letter of intent states the price on a cash-free, debt-free basis with a normal level of working capital included. It names the method for the peg, and it can leave the dollar figure open.
2. Diligence builds the peg from monthly balance sheets, using the same normalized books your accountant tests in the earnings review.
3. The purchase agreement fixes the peg as a dollar figure and attaches an example calculation and the accounting policies that govern it.
4. The seller delivers an estimated closing statement before the closing date. The price adjusts at closing for the estimated gap.
5. After closing you prepare the final closing statement. The two sides true up the difference, and an independent accountant resolves any dispute they cannot settle.

In an asset sale you pick the assets and liabilities you take, so the peg must match exactly what transfers. If you do not buy the receivables, the peg covers only the accounts you do buy. The letter of intent guide shows where the peg language belongs in the offer.

The peg is a protection for you, and it is also a price term, so a peg that is too low transfers value to the seller without anyone calling it a price cut.

The peg is a purchase agreement term, not an SBA term, but six rules in SBA SOP 50 10 8.1, in force since October 1, 2026, decide how much room you have to negotiate it and how you fund a true-up.

The Quality of Earnings rule matters most for pegs. The monthly cash proof the report requires is the same dataset you need to build a peg: month-end receivables, inventory, and payables over the trailing period. At a business purchase price of $3,000,000 or more (the purchase price less appraised owner-occupied real estate), the lender requires the report. Below that, the lender does not require one, and you should still order one to price the peg. A buyer-ordered report can be reviewed by the lender through a qualified vendor if it meets SBA minimums. Read the quality of earnings explainer before you hire anyone.

Because the valuation caps total acquisition debt, ask your lender before the LOI whether an upward true-up payment can be financed inside the approved project cost or has to be paid from cash you hold in reserve.

A peg changes the price by the exact gap between the working capital delivered at closing and the peg figure, and the way the peg is calculated can move that gap by tens of thousands of dollars before anyone discusses the headline price.

Inputs. The example deal has a $3,000,000 purchase price on a cash-free, debt-free basis, with normal working capital included. The business earns $650,000 in SDE (net profit plus one owner's full compensation plus documented add-backs). SDE sets the price here, and no multiple is applied in this example. The financing uses the 10% injection, split 5% cash and 5% standby note. The working capital figures below are illustrative assumptions, not data: assumed quarterly average working capital of 7% of the $3,000,000 price in the first quarter (0.07 x $3,000,000 = $210,000), 8% in the second (0.08 x $3,000,000 = $240,000), 9% in the third (0.09 x $3,000,000 = $270,000), and 8% in the fourth (0.08 x $3,000,000 = $240,000), and assumed working capital delivered at closing of 7.5% of the price (0.075 x $3,000,000 = $225,000).

Step 1, the injection on the price alone. 10% of $3,000,000 is $300,000. Half is $150,000 in buyer cash (5%). The other half is $150,000 as a seller note on full standby (5%). Closing costs and other project costs raise the total project cost, and the injection is figured on that larger total.

Step 2, build the peg. Your accountant pulls month-end operating working capital (receivables plus inventory plus prepaids, minus payables, accrued payroll, and deposits) and averages it by quarter. Using the assumed quarterly averages, $210,000 plus $240,000 plus $270,000 plus $240,000 equals $960,000, and the average is $960,000 divided by 4, or $240,000. That is your peg.

Step 3, the seller counters. The seller proposes a peg built from the first quarter only, which is the assumed 7% of $3,000,000, or $210,000, arguing that the later quarters reflect a busy stretch. The gap between the two pegs is $240,000 minus $210,000, or $30,000.

Step 4, closing. Using the assumed input, the seller delivers 7.5% of $3,000,000, or $225,000, of working capital at closing.

The same closing produces a final price of $2,985,000 under your peg ($3,000,000 minus $15,000) and $3,015,000 under the seller's ($3,000,000 plus $15,000). The $30,000 difference is the cost of the peg method, and it equals one-fifth of your $150,000 cash injection. If you accept the lower peg, you pay $30,000 more for the same $225,000 of working capital, and you still have to put $15,000 from your reserve into the business to bring it up to the $240,000 level it needs. The lender does not count that reserve toward your injection, and the 1.25x coverage test is unchanged by it.

Notice what the example excludes: if diligence finds an aging truck or a roof that needs replacing, that is a capital item. You take it off the price as a separate negotiation, not through the peg and not by cutting SDE before the multiple.

The side that brings the monthly data and a clean definition wins most individual points, because a peg is an arithmetic dispute and the party holding the spreadsheet frames the arithmetic. These are the points that get negotiated.

Two of these points interact with your financing. A collar can blunt a small shortfall. A set-off against a seller note on full standby changes the note balance, so you need the lender to approve that language before it goes in a draft. The note stays on standby for the full life of the SBA loan, and you do not plan to refinance it early.

Quality of the seller's books decides the rest. A seller who closes the books monthly and reconciles receivables gives you a peg you can accept quickly. A seller whose books are cash-basis forces a restatement, and the restated numbers favor whoever hired the accountant. This is another reason the report that the lender requires cannot be prepared by or for the seller at $3,000,000 or more, and why you want your own at any size.

Concede a collar before you concede a definition, because a collar costs you a bounded amount and a loose definition has no ceiling.

The costliest mistake is agreeing to a peg number in the LOI before diligence has produced a single monthly balance sheet. A fixed figure written early becomes the anchor, and every later finding has to argue against it. Write the method into the LOI and leave the figure to the accountant.

• Including cash in working capital. Cash belongs to the cash-free, debt-free structure. Counting it in the peg double counts it.
• Ignoring seasonality. If you close in a trough, the seller delivers a low balance and you buy a business that needs refilling. If you close at a peak, you pay for working capital the business will release later. Average across the cycle or set the peg by closing month.
• Leaving out accrued liabilities. Accrued payroll, vacation, and customer deposits are obligations you inherit in a stock deal, or fund in an asset deal when employees transfer. If they are not in the peg, you pay for them twice. Read how employees transfer in a sale to see which accrued liabilities follow them.
• Accepting stale receivables at face value. A receivable you cannot collect is not working capital.
• Mixing up capital items and working capital. Deferred maintenance and a fleet refresh come off the price, not off the peg. Only recurring operating costs change earnings, and the peg does not touch earnings at all.
• Normalizing earnings one way and the peg another. If an add-back removes an owner expense from SDE, the matching payable or prepaid has to be treated the same way in the peg. The add-backs explainer covers which adjustments hold up.
• Not holding reserve cash for the true-up. Your injection funds must be verified in your bank statements for at least 30 days, and a post-closing payment comes from cash you still have after closing.
• Skipping the lender conversation. The valuation caps total acquisition debt. Any price above it must be funded with equity or debt on full standby, which a large upward adjustment can trigger.

Run each of these against your draft agreement with your accountant and your lender in the same week, before the exclusivity period under the LOI runs down.

Start by requesting 24 monthly balance sheets and a receivables aging from the seller, because the peg cannot be built from annual statements. Then work through these steps:

1. Put the peg method, not the number, in the LOI: cash-free, debt-free, a normal level of working capital included, and a full-cycle average.
2. Hire your own accountant for the earnings review. At a business purchase price of $3,000,000 or more the lender requires the report anyway, and a buyer-ordered one can be reviewed through the lender's vendor if it meets SBA minimums.
3. Define the accounts in writing: which receivables, which inventory, which accrued liabilities, which deposits. Attach a sample calculation to the purchase agreement.
4. Ask the lender how an upward or downward true-up fits the approved project cost, the valuation cap, and any standby note offset.
5. Set aside reserve cash beyond your injection so a post-closing payment does not break your liquidity.
6. Model the whole structure, including the 10% injection and the 1.25x coverage, in the acquisition calculator and read how seller notes work before you agree to any set-off.

Munera runs Acquisition Launch for buyers: we source off-market deals and introduce lenders, so the peg conversation with the lender can start before you submit an LOI.