The Working Capital Peg: The Purchase Price Adjustment Most Sellers Miss

Most owners negotiate the headline price for their company and assume the hard part is finished. The number that actually determines what lands in the bank account, though, is often a working capital target set weeks later in the purchase agreement, in language many sellers skim. That single figure now appears in more than 90 percent of private-target transactions, up from roughly half a decade ago, and the money it moves is real.

The Number Behind the Number

Nearly every private company sale today is priced on a cash-free, debt-free basis. The buyer pays an enterprise value, then takes the business without its cash and without its debt. What the buyer does need is enough day-to-day liquidity to keep operating on Monday morning: receivables to collect, inventory to sell, payables that come due on a normal schedule.

That liquidity is net working capital, and the deal fixes an expected level for it. The agreed level is the peg, sometimes called the target. Deliver working capital above the peg at closing and the purchase price adjusts up, dollar for dollar. Deliver below it and the buyer deducts the shortfall.

The logic is fair enough in principle. Without a peg, a seller could collect receivables aggressively, stretch payables, and run inventory down to nothing in the final month before closing, handing over a business that needs an immediate cash injection. The peg prevents that. It also, less obviously, becomes a negotiation over several hundred thousand dollars that most sellers enter without preparation.

How the Peg Actually Gets Set

The dominant convention in the middle market is a trailing twelve-month average: take the monthly working capital balance for each of the twelve months ending at the most recent month-end before signing, and average them. Roughly 70 percent of middle-market deals use some version of this approach. It has real merits. It captures seasonality, it smooths the timing quirks that make any single month-end unrepresentative, and it is difficult for either side to characterize as cherry-picked.

The merits do not make it neutral. A business that has been growing needs progressively more working capital to support higher revenue, so a twelve-month look-back sets the peg using a period when the company was smaller. That works in the seller's favor. A business with a seasonal peak just before closing faces the reverse problem. And a buyer who prefers a higher target will argue for the twelve-month average precisely when a seller pushing a three-month recent average would land somewhere higher. On a company carrying roughly a million dollars of working capital, the gap between those two methodologies is commonly two hundred thousand dollars, transferred from one side of the table to the other by a choice of averaging window.

A second and quieter shift has been underway in how the peg is defined. Historically the standard was GAAP consistently applied, meaning working capital gets computed the way the accounting rules require, applied the way the company has always applied them. In SRS Acquiom's 2026 study of more than 1,500 private-target acquisitions representing over $385 billion of value, GAAP consistently applied fell to about 32 percent of deals, the lowest share recorded. The approach that overtook it is the worksheet method, now in roughly 39 percent of deals, where the parties attach an example calculation to the agreement showing exactly which accounts are included, which are excluded, and how each is measured.

For a seller, the worksheet method is usually the better outcome. It converts an argument about accounting principles, which the buyer's advisors will generally win, into an argument about a specific schedule that both sides signed.

Where the Money Moves

The adjustment happens twice. At closing, the parties estimate working capital and adjust the wire accordingly. Then, after closing, the buyer prepares a final calculation from actual numbers and the estimate gets trued up.

That second step is where sellers get surprised. In middle-market deals with enterprise values between $50 million and $500 million, Houlihan Lokey's post-close data puts the median absolute true-up at roughly 1.4 percent of purchase price. On a $60 million sale, that is about $840,000 moving after the deal has closed. And the direction is not random: approximately 60 percent of true-ups favor the buyer, which is unsurprising given that the buyer controls the books and prepares the calculation.

The timing mechanics compound the exposure. Purchase agreements typically give the buyer 60 to 120 days after closing to deliver the final statement, with 90 days as the common median. During that window the buyer is operating the business, closing the month, and making judgment calls on reserves that flow straight into the number the seller receives or repays. A separate working capital escrow, usually around 1 percent of transaction value and held for 60 to 90 days, is what funds any shortfall.

Where Disputes Start

Working capital disputes are rarely about arithmetic. They are about definitions that seemed obvious at signing.

Inventory is the largest single source, driving roughly 22 percent of arguments. The question is almost never how much inventory exists. It is whether slow-moving stock should carry a reserve, and if so how large, and whether the company's historical reserve practice was adequate or merely habitual. A buyer who books a more conservative reserve in the first post-closing month reduces working capital, and the seller pays the difference.

Receivables raise the same issue in a different form. So do accrued liabilities that the company never formally accrued, such as unused vacation, customer rebates earned but not yet claimed, or warranty obligations. If the historical balance sheet omitted an item and the buyer's final calculation includes it, working capital drops relative to a peg that was built from balance sheets that never carried the item. Consistency, in that scenario, matters more than technical correctness, which is exactly why the worksheet method has been gaining ground.

What to Watch

Two developments are worth tracking. The continued drift toward worksheet definitions suggests the market is quietly accepting that GAAP is too elastic for a mechanism this consequential, which means a seller who asks for a worksheet in 2026 is asking for something conventional rather than aggressive. Separately, buyers have been enlarging escrows and holding them slightly longer as they price in post-closing uncertainty, so the working capital escrow deserves to be negotiated alongside the indemnity escrow rather than treated as boilerplate.