If you’re like most business owners, you’ve spent years sweating over growth, margins, and customers—but probably not over working capital adjustments. And why would you? The phrase alone sounds like something only your accountant should worry about. Yet, when it comes time to sell your business, this little clause in the purchase agreement can mean hundreds of thousands—or even millions—swept off the closing check.
I’ve seen it time and again: owners focus on the headline multiple and walk into due diligence only to discover that the real battleground is buried in the fine print. Let’s unpack how this works, why it catches so many sellers off guard, and what you can do to protect yourself.
What Is a Working Capital Adjustment?
In plain English, working capital is your short-term financial plumbing: receivables, payables, and inventory. Buyers expect that when they purchase your business, it will come with enough “plumbing” to keep water flowing on day one.
When you sell your business “cash-free, debt-free,” that doesn’t mean you get to scoop up all the receivables and inventory on your way out the door. Buyers want a normal level of working capital delivered with the business.
This is often referred to as the working capital peg. The peg is essentially a target: the agreed-upon amount of working capital that will be in the business at closing. If actual working capital falls short of the peg, the purchase price gets reduced. If it’s higher, you may actually pocket a little more (though in practice, buyers structure things conservatively to avoid paying extra).
Most owners don’t fully understand this concept until late in diligence. And by then, their leverage is shrinking.
A common reaction is…“Wait a minute—I’ve already collected my receivables before closing. Why am I getting dinged for not leaving more working capital behind?” From the seller’s point of view, it feels like paying twice. From the buyer’s standpoint, it’s simply ensuring they don’t have to inject more cash on day one.
Cash accounting adds fuel to the fire. Because revenues and expenses are recorded when money changes hands—not when they’re earned or incurred—cash-basis statements often disguise timing mismatches. That makes it harder to see the true level of working capital, which leads to bigger surprises when the buyer’s accountants “normalize” the numbers.
How the Peg Gets Calculated
Most deals set the peg using a trailing twelve-month average of working capital. Simple enough on paper, but messy in practice.
Seasonal businesses (retail, agriculture, HVAC contractors) often get tripped up because the peg doesn’t reflect the ebb and flow of busy versus slow months. High-growth companies can be penalized when historical averages don’t keep pace with today’s higher requirements. Distribution and project-based businesses tend to have lumpier inventory or receivables, which make defining “normal” even more contentious.
Buyers, of course, prefer conservative assumptions—because it protects them. Sellers often feel squeezed because the formula doesn’t reflect the actual rhythm of the business.
The Real Impact on Value
Let’s take a look at how this might play out. Suppose you’ve agreed to sell your company for $20 million. You assume you’ll walk away with, well, $20 million. But the purchase agreement sets a $3 million peg. At closing, actual working capital comes in at $2 million. Suddenly, you’re looking at $19 million instead of $20 million.
One million dollars evaporates—not because of EBITDA, not because of the multiple, but because of the mechanics. For many business owners, that could be the equivalent of years of distributions gone in a blink.
And remember: buyers don’t see this as a “takeaway.” They see it as protecting themselves from having to inject liquidity immediately after the deal.
How to Get Ahead of It
A little foresight saves a lot of headache. Work with your advisor to form a view on the issue early. Don’t wait until the purchase agreement.
- Normalize the Business – Don’t suddenly start stretching payables or cutting inventory to pretty up cash flow in the months leading up to the sale. Buyers will see it and adjust accordingly.
- Document Seasonality – If your business is cyclical, gather data that supports an adjusted peg. This makes your argument credible when you push back.
- Anticipate and Plan For Negotiation – Expect them to round the number in their favor. Be ready with facts and analysis to counter.
A good advisor should be able to help you with all of these things.
Working capital adjustments rarely make the headlines of a deal. But for the business owner about to sell a business, they can have an outsized effect on the final check you take home. Prepare, plan, and get expert help. Whether you call it business consulting services or seasoned deal-making, this is one of those times when professional guidance pays for itself.