What is a net working capital peg?

The level of operating working capital the seller agrees to deliver at closing, usually based on the trailing twelve-month average of normalized working capital. The purchase price adjusts dollar for dollar for any difference at closing.

How is a net working capital peg calculated?

Build accrual-basis monthly balance sheets for the trailing twelve months, remove cash, debt, taxes and other excluded items, normalize each month for one-time items and cutoff errors, and average the results.

Do buyers want a higher or lower working capital peg?

Buyers want a higher peg and sellers want a lower one. A higher peg requires the seller to leave more working capital in the business or accept a lower price if closing working capital falls short.

Is cash included in the working capital peg?

Usually not. Most lower middle market deals are cash-free and debt-free, so cash, debt and debt-like items are excluded from working capital and settled separately.

What happens if working capital at closing is below the peg?

The purchase price is reduced by the shortfall, dollar for dollar, unless the agreement sets a collar or threshold that absorbs small differences.

Articles

Net Working Capital Peg: How It Is Set, With a Worked Example

Josh Cashman · 13 Oct 2026

Short answer: A net working capital peg is the level of operating working capital the seller agrees to deliver at closing. It is usually set from the average of normalized monthly working capital over the trailing twelve months. If working capital at closing comes in below the peg, the purchase price goes down dollar for dollar; if it comes in above, the price goes up.

The peg exists because the buyer is paying for a business that can operate on day one without an immediate cash injection. Getting it right is mostly a data problem: the peg is only as good as the monthly balance sheets it is averaged from.

What goes into net working capital for a peg

Deal working capital is narrower than the textbook definition of current assets minus current liabilities. It is meant to capture operating working capital only:

Included: trade accounts receivable, inventory, prepaid expenses, trade accounts payable, accrued expenses such as payroll and payroll taxes, and customer deposits or deferred revenue
Usually excluded: cash, debt and debt-like items, income taxes, transaction costs, and balances with the owner or related parties, which are settled separately in a cash-free, debt-free deal

The definition belongs in the purchase agreement, ideally with an illustrative calculation attached. Most closing disputes trace back to a definition that was never written down.

How the peg is calculated

Build a monthly balance sheet for each of the trailing twelve months on an accrual basis.
Strip out the excluded items so each month shows operating working capital only.
Normalize each month: reverse one-time items, correct cutoff errors, and record accruals the business only books at year end.
Average the twelve normalized months. Seasonal businesses sometimes use the same months of the prior year or a longer average instead.

A worked example

An illustrative business with steady seasonality. Normalized operating working capital, in thousands of dollars:

Month	Normalized net working capital
Oct	$412K
Nov	$398K
Dec	$425K
Jan	$441K
Feb	$455K
Mar	$430K
Apr	$418K
May	$402K
Jun	$389K
Jul	$410K
Aug	$436K
Sep	$448K
Twelve-month average (the peg)	$422K

The peg is $422K. At closing, working capital is measured at $395K, which is $27K short of the peg, so the purchase price falls by $27K. Had closing working capital come in at $440K, the seller would receive an extra $18K, unless the agreement caps upward adjustments or sets a collar around the peg.

Do buyers want a higher or lower peg?

Buyers want a higher peg and sellers want a lower one. A higher peg means the seller must leave more working capital in the business, or accept a lower price if they fall short. That is why normalization is negotiated so hard: every month that gets adjusted upward raises the average the seller has to deliver.

Where pegs go wrong in lower middle market deals

Cash-basis books. Many smaller businesses do not record receivables, payables or accruals monthly. Twelve monthly balance sheets have to be rebuilt on an accrual basis before an average means anything.
Year-end-only entries. Inventory counts, bonuses and accruals booked only in December distort the months around them.
Customer deposits. Deposits are a liability. Leaving them out flatters working capital and hands the seller cash the buyer still owes customers work for.
Owner and related-party balances. They are not operating working capital and need to be settled outside the peg.
Unverified receivables. Receivables that never turn into deposits inflate the average. A proof of cash shows whether billed revenue actually reached the bank.

How QoEAgent supports the peg analysis

Our Proof of Cash Plus engagement produces GAAP-formatted monthly balance sheets and income statements for the trailing twelve months and the two prior fiscal years, typically within 48 hours of data ingestion, with the proof of cash first at 24 hours. The full quality of earnings, QoE Essentials, adds the working capital analysis itself: normalized monthly working capital, the operating cycle (days sales outstanding, days inventory outstanding, days payables outstanding and the cash conversion cycle), and the items that should sit outside the peg. See the quality of earnings checklist, our notes for corporate development teams, and when an add-on needs a full QoE.