One thing that kills large deals is working capital PEGs don’t get addressed early by the broker and the parties. Small business owners often run their business with little to no understanding that if they sell to a private equity group of a more sophisticated buyer they will look for the working capital to be given to them in the sale. Here is an example of the way it works.
📌 Business Profile
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Purchase Price: $4,000,000
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Industry: B2B Services
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Transaction Type: Asset Sale
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Buyer Type: Private Equity / SBA Hybrid
Step 1: Define Net Working Capital (NWC)
Net Working Capital is typically calculated as:
Current Assets – Current Liabilities
Included:
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Accounts Receivable (AR)
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Inventory
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Prepaid Expenses
Excluded (often):
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Long-term debt
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Owner loans
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Fixed assets
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Sometimes cash (deal-specific)
Step 2: Historical Working Capital Analysis
Buyer reviews the trailing 12 months and calculates the monthly average NWC:
| Month | AR | Inventory | Prepaids | AP | Accruals | Net WC |
|---|---|---|---|---|---|---|
| Avg (TTM) | $480,000 | $320,000 | $50,000 | ($410,000) | ($140,000) | $300,000 |
📌 Result:
The historical average Net Working Capital = $300,000
Step 3: Set the Working Capital Peg
The LOI states:
“The transaction assumes a normalized net working capital target of $300,000, to be delivered at closing.”
This becomes the working capital peg.
Step 4: Closing-Day Adjustment Scenarios
✅ Scenario A: Seller Delivers MORE Than the Peg
Net Working Capital at Closing: $340,000
Peg: $300,000
Adjustment:
$340,000 – $300,000 = +$40,000
➡️ Seller receives an additional $40,000 at closing
❌ Scenario B: Seller Delivers LESS Than the Peg
Net Working Capital at Closing: $260,000
Peg: $300,000
Adjustment:
$260,000 – $300,000 = –$40,000
➡️ Purchase price is reduced by $40,000
(or escrow/holdback is triggered)
Why This Matters
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The headline price didn’t change
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The economics absolutely did
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Poor AR collections or inventory mismanagement in the final months can quietly cost six figures
How a Seller Could Improve This Peg (Legitimately)
In this example, the seller could:
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Tighten AR collections before LOI
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Remove obsolete inventory
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Normalize AP payment timing
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Document seasonality clearly
Those actions don’t manipulate the peg—they support a higher, defensible baseline.
Social Media Post (LinkedIn / Facebook)
Option 1: Educational / Authority Tone
💡 Working Capital Can Move the Price—Quietly.
A $4M deal with a $300K working capital peg:
• Deliver $340K → Seller gets +$40,000
• Deliver $260K → Seller loses $40,000Same price. Very different outcome.
Most sellers focus on valuation—but working capital is where deals quietly shift.
This is why preparation before the LOI matters.
— Michael Shea
Transworld Business Advisors of Tampa
Michael Shea represents the Tampa Florida Transworld office. In business since 2005, he has established a reputation as a trusted business broker across Florida’s key markets- from Tampa to Orlando, Melbourne, and more. Over the past two decades, Michael and his team have closed over $1 Billion in sold business volume and presided over more than 450 transactions. His credentials include the IBBA Certified Business Intermediary®, and most recently, the prestigious Certified Exit Planning Advisor® (CEPA) credential.