2026-06-16 (updated 2026-09-14) · By Abhishek Bhandari · Zion Advisory Briefs

NWC Peg in M&A: Target, Calculation & True-Up

The working capital peg is one of the most common sources of post-closing disputes — and one of the easiest to get right if both parties understand the mechanics early. A peg set without a written methodology, built on unrepresentative months, or left ambiguous on what counts as working capital will end up as a price argument. A clean peg agreed at LOI, with monthly schedules attached, saves both sides at closing.

What the working capital peg actually is

The working capital peg is the agreed level of net working capital (NWC) that the seller leaves in the business at completion. It is sometimes called the target NWC or just the Peg. The buyer funds anything above the peg; the seller takes anything below it. The definition of what counts as working capital — receivables, inventory, payables, accrued expenses, and which items are excluded — is negotiated, not given.

In most deals the business is sold on a cash-free, debt-free basis. That means the seller removes cash and debt before completion, but the ordinary operating working capital needed to run the business on day one stays behind. The peg exists so the buyer does not pay for the enterprise and then have to inject more working capital on the first Monday morning to pay payroll, suppliers and receivables collections.

The basic mechanism

At signing, buyer and seller agree on a target NWC level. At closing, actual NWC is measured against that target using the accounting methodology specified in the purchase agreement.

If actual NWC is above the peg, the excess is treated as additional purchase price, paid to the seller. Dollar-for-dollar.
If actual NWC is below the peg, the shortfall reduces the purchase price, paid by the seller. Dollar-for-dollar.
A collar or de minimis threshold is sometimes negotiated — no adjustment unless the difference exceeds a specified dollar amount or percentage, so that trivial timing differences between the peg date and the closing date do not trigger a true-up payment.

The peg keeps the deal fair in both directions. The buyer gets a business with the liquidity it needs to operate. The seller is paid appropriately for the capital they have left behind.

How the peg is set: methodology

The peg is almost always built from a trailing twelve-month (TTM) average of NWC, adjusted for known changes that will not repeat after completion. Using a period average instead of period-end avoids a single unusual month distorting the target — for example, a seasonal peak, a large one-off payment, or a temporary delay in paying suppliers.

The methodology should define, in writing and before the peg is negotiated:

Which components count. Common current assets: accounts receivable, inventory, prepaid expenses. Common current liabilities: accounts payable, accrued payroll, accrued expenses, accrued taxes. The agreement must state what is in and what is out.
What accounting policy applies. The purchase agreement should specify which accounting basis is used to calculate NWC at the peg date and at actual closing — typically consistent with how the financials have been reported to date.
How seasonality is treated. For a business with material seasonal swings, an annual average can be the wrong number for the month the deal closes. A peg matched to the closing month, or a seasonally adjusted average, is more defensible.
What one-time items are removed. Large prepayments, temporary vendor payment delays, or a non-recurring receivable should be normalised out of the peg calculation, with each removal documented.
The comparison mechanics. How actual NWC at closing is measured, what date it uses, what the formula is, and what happens in the event of a disagreement.

Worked example: how the peg moves price

A seller and buyer agree a peg of $20.5 million based on a TTM average of adjusted NWC. At closing the seller's team calculates actual NWC at $22.5 million.

Actual above peg: $22.5m − $20.5m = $2.0m excess. The buyer pays the seller an additional $2.0m at completion, and the purchase price goes up by that amount.

If instead the seller delivers $18.5 million at closing:

Actual below peg: $18.5m − $20.5m = $2.0m shortfall. The buyer pays $2.0m less, and the purchase price goes down by that amount.

The peg protects the buyer from paying the enterprise price and then having to put cash in to run the business. It protects the seller from over-delivering working capital for free. Both sides end up paying or receiving only what was actually delivered.

Where deals go wrong

Most peg fights trace back to ambiguity, not bad faith. The following show up repeatedly in disputes after closing:

Undefined accounting policies. If the purchase agreement does not say how receivables are pencilled, how payables accrue, or how inventory is valued, the buyer's team and the seller's team can end up with materially different numbers from the same ledger.
Inconsistent treatment of one-time items. A large payment received or made in the closing period, an unusual accrual, a seasonal distortion — each of these can move the peg if no one agreed how to handle it in advance.
A peg built on unrepresentative months. A peg set on four quiet months in a dormant period does not reflect what the business needs to operate. The buyer inherits a business that is short of working capital; the seller thinks they have already left enough behind.
Inventory disputes. Obsolete or slow-moving stock that is carried at cost on the balance sheet but is not actually saleable. Stale receivables that are a collection risk. Stretched creditors that were deliberately slowed before completion. Each of these is a judgement, not a fact.
Double-counting with debt. Cash, short-term debt and income taxes payable are usually removed in a cash-free, debt-free sale. The methodology must make sure the same item is not counted twice — once as part of NWC and once as a debt-like item.

Seasonality and the peg

Businesses with real seasonal swings are where generic peg advice fails. A retail or consumer brand with a big Christmas inventory build, a B2B services firm with a month-end billing cycle that runs long, or a manufacturer with a predictable inventory build before a seasonal ramp — each of these can produce a peg that looks reasonable on an annual basis but is the wrong number for the month the deal closes.

The fix is a peg methodology that acknowledges the seasonality in writing at the LOI stage, covers how the closing month compares to the TTM average, and specifies whether the peg should be adjusted for the seasonal position at closing. A databook with monthly NWC schedules makes that adjustment transparent — both sides see the same seasonal pattern and agree on which months to use.

How we support it

Our databooks include dedicated NWC and Net Debt schedules with monthly granularity, so the peg can be negotiated from evidence rather than estimates. We build the schedules from the source ledger, reconcile them to the reported financials, and flag the items that are most likely to be disputed — stretched creditors, obsolete stock, bad debt provisions, and unspent accruals. Both sides then see the same history. See M&A Databooks.

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About this

The working capital peg is the most common source of post-completion dispute. Getting it right is not about the number; it is about the definition — and the definition should be written down at LOI, with monthly schedules to back it up.

Frequently asked questions

What is a working capital peg?

The level of net working capital that the seller leaves in the business at completion. The buyer funds anything above the peg; the seller takes anything below it. The definition of what counts as working capital is negotiated, not given.

Why is the LTM average used instead of period-end?

Because period-end can be distorted by a single large payment, a seasonal peak or a one-off distortion. The LTM average smooths those out and gives a more defensible normal level. The buyer will still test it, but the starting point is stronger.

What items are most often disputed?

Stretched creditors, obsolete stock, bad debt provisions, and the treatment of accrued expenses. Each of those can move the peg by a material amount, and each is a judgement rather than a fact. A clean databook with monthly NWC schedules removes the guesswork for both sides.

When should the peg methodology be agreed?

At LOI, before the peg is negotiated numerically. Once both sides have agreed in writing what NWC includes, which accounting basis applies, how seasonality is treated, and how actual NWC at closing is measured, the number can be negotiated without reopening the methodology later.

How is the peg different from the purchase price adjustment?

The peg is the agreed target. The purchase price adjustment is what happens when the actual NWC at closing differs from the peg — the price goes up or down dollar-for-dollar against the competitor. The methodology for setting the peg and measuring actual NWC is what prevents the adjustment from becoming a fight.