Meaning
A financial benchmark defines the normal level of operating liquidity agreed upon by a buyer and a seller. During a sale, working capital pegs represent the amount of current assets minus current liabilities that must remain in the business at closing. This target prevents the seller from draining the cash or delaying payments to increase their own payout.
It ensures the business is ready to operate on day one without immediate cash injections.
Closing Adjustment
The calculation is performed after the transaction to compare the actual assets to the target level. If the level is below the working capital pegs, the purchase price is reduced by the difference. If it is higher, the buyer typically pays the seller the surplus amount.
Seasonal Variance
Setting the correct level requires an analysis of the historical trends of the business. Because many companies have fluctuations throughout the year, working capital pegs are often based on a twelve-month average. This approach ensures that the benchmark is fair and does not penalize either party for timing.
Cash Impact
Reaching an agreement on this number is a central part of the final negotiation. The working capital pegs directly affect the net proceeds the founder receives from the sale because every dollar below the target is a dollar removed from the check. A well-defined peg reduces the risk of a post-closing dispute.
