The working capital peg is the normalized level of net working capital that the buyer and seller agree the business needs to operate, set at close (often as a trailing twelve-month average) and used to true up the purchase price. It is the deal's answer to a simple question: how much working capital should be in the business on the day the keys change hands?
Why it matters
The peg stops a seller from dressing up the balance sheet before closing, for example by collecting receivables fast and stretching payables to strip cash out. The buyer wants the business delivered with a normal level of working capital, not an empty tank that the buyer then has to refill with its own cash after close. Without a peg, a seller can quietly convert working capital into purchase-price proceeds.
Truing up at close
The peg is set at $20M. If actual net working capital at close is $22M, the seller delivered $2M more than agreed and the price adjusts up by $2M. If it comes in at $18M, the price adjusts down by $2M. The adjustment is dollar for dollar, which is why both sides scrutinize the close-date balance sheet.
The common mistake
Confusing the peg, a one-time price true-up at close, with the ongoing investment in working capital that consumes free cash flow every year as the business grows. They are different things and both matter: the peg protects the buyer at close, while the ongoing working-capital build is a permanent drag on the cash available to delever. The full mechanics, including the cash conversion cycle, are in the NOWC guide.