Net Working Capital Peg

A business needs a normal level of working capital, such as receivables and inventory minus payables, to operate. Buyers expect to receive this level as part of the business. Without a peg, a seller could, for example, collect receivables early or delay paying suppliers before completion, taking cash out of the business.

The peg is usually set based on the business's average working capital over a recent period, often twelve months, adjusted for seasonality and unusual items.

For example, the parties agree a peg of 10,000,000. At completion, the actual working capital is 9,200,000. The purchase price is reduced by 800,000. If working capital had been 10,500,000, the price would have increased by 500,000.

Negotiating the peg can be contentious, because small differences in definitions or the period used can significantly affect the price. It is closely linked to completion accounts and debt-free cash-free pricing.