The working-capital peg

This is educational. It is not legal, tax, or financial advice, and it is not a form of purchase agreement.

A business that changes hands still has to open on Monday. Inventory, receivables, and payables are the working capital that makes Monday possible. Cash in the account and the company's bank debt are usually pulled out of that discussion and settled on their own. What remains is a net working capital figure: current assets excluding cash, minus current liabilities excluding interest-bearing debt. The purchase agreement can define those words differently. The contract controls.

A peg is the target the parties negotiate for that figure. It is not a statute. SBA's SOP 50 10 tells lenders how to underwrite a loan. It does not publish a peg as a percent of revenue, and this page will not invent one. If delivered working capital is above the peg, a typical agreement has the buyer pay the difference, because the seller left extra working capital in the company. If it is below the peg, the price usually comes down.

The fight, when there is one, is the definition. Is deferred revenue a liability? Is a seasonal inventory spike the peg, or a twelve-month average? Those are negotiation questions for the buyer, the seller, and their accountants. The explainer on this site only does the subtraction you type in.

Quality of earnings work, when you hire it, is where a CPA tests whether the peg year was a normal year. NewHands's add-back worksheet is arithmetic, not that engagement.