Working Capital Peg defined: the normalized level of net working capital buyer and seller agree on at close, used to true up the purchase price so the business arrives with a full tank.
By Andrew Gallagher · Private equity investor; former middle-market PE Senior Associate
Exhibit
The working capital peg is the normalized level ofnet 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.
Worked example
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 theNOWC guide.
Calculator
Price adjustment
Direction
Actual NWC above the peg raises the price (a payment to the seller); below the peg lowers it.
Frequently asked
What is a working capital peg?
It is the normalized level of net working capital that buyer and seller agree the business needs to operate, set at close and used to true up the purchase price. Delivering above the peg increases the price; delivering below it decreases the price.
How is the peg usually set?
Most often as a trailing twelve-month average of net working capital, sometimes seasonally adjusted, so it reflects a normal operating level rather than a single point that either side could engineer.
Is the working capital peg the same as the ongoing working-capital investment?
No. The peg is a one-time price true-up at close. The ongoing investment in working capital is the cash the business absorbs every year as it grows, which reduces free cash flow. Both matter and they are different things.
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Middle-Market Distribution LBO Model
Definitions stick when you can trace them through a working model. The free Middle-Market Distribution LBO Model runs the same case used across this glossary, $150M TEV at a 6.0x entry on $25M of EBITDA, with sources and uses, a full debt schedule, sponsor returns, and sensitivities in banker-standard formatting.
