By Michael Shea, Transworld Business Advisors of Tampa
Many business owners focus almost exclusively on sale price. But seasoned sellers know that working capital—how much cash, inventory, and short-term assets stay in the business at closing—can quietly swing deal economics by hundreds of thousands of dollars.
In lower middle market transactions especially, the working capital peg is one of the most misunderstood—and most negotiable—components of a deal.
Understanding how it works, and preparing for it early, gives sellers a meaningful advantage.
What Is a Working Capital Peg?
The working capital peg is an agreed-upon target level of net working capital that must remain in the business at closing.
Net working capital typically includes:
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Cash (sometimes excluded, sometimes partially included)
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Accounts receivable
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Inventory
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Prepaid expenses
minus -
Accounts payable
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Accrued expenses
If actual working capital at closing is:
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Above the peg → Seller may receive a purchase price adjustment upward
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Below the peg → Seller may owe a price adjustment to the buyer
In short, the peg ensures the buyer receives a business that can operate normally on Day One.
Why Buyers Care So Much About Working Capital
Buyers aren’t trying to reduce price—they’re trying to avoid surprises.
They want to ensure:
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Payroll can be met
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Vendors can be paid
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Inventory levels support ongoing sales
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Cash flow doesn’t immediately stall post-close
From a buyer’s perspective, a weak working capital position represents hidden risk—and risk gets priced in.
Where Sellers Get Caught Off Guard
Many sellers assume:
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“Cash is extra”
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“Inventory is valued separately”
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“I can clean things up after we sign the LOI”
In reality:
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Working capital terms are often set in the LOI
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Banks and private equity buyers scrutinize it heavily
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Poor working capital management late in the process can trigger retrades or escrow holdbacks
How the Working Capital Peg Is Determined
The peg is usually based on:
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A historical average of net working capital
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Seasonal adjustments (critical in Florida businesses)
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Industry norms
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Buyer operating assumptions
Typically, buyers look at:
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Trailing 12 months (TTM)
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Monthly averages
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Peak vs. trough balances
A well-supported peg is based on data, not negotiation tactics.
How Sellers Can Improve the Working Capital Peg (Legitimately)
This is where preparation makes a real difference.
✅ 1. Clean Up Accounts Receivable
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Tighten collection practices
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Write off stale or uncollectible AR
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Normalize customer payment terms
📌 Buyers discount questionable receivables—clean AR strengthens your position.
✅ 2. Normalize Inventory Levels
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Remove obsolete or slow-moving inventory
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Avoid artificially inflating inventory pre-sale
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Document turnover rates
📌 Quality matters more than quantity.
✅ 3. Manage Payables Strategically (Not Aggressively)
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Avoid delaying payments unnaturally before close
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Keep vendor relationships healthy
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Maintain consistent payment cycles
📌 Artificially stretching payables raises red flags and often gets reversed post-close.
✅ 4. Document Seasonality
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Clearly show working capital swings during peak and slow periods
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Support peg calculations with historical data
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Adjust peg expectations accordingly
📌 This is especially important in tourism- and construction-adjacent Tampa businesses.
✅ 5. Separate “Excess Cash” Early
Not all cash is treated the same.
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Some deals exclude excess cash from working capital
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Others include a minimum operating cash balance
📌 Defining excess cash early prevents disputes later.
✅ 6. Improve Operational Discipline
Consistent billing, timely invoicing, and accurate accruals all support a higher, defensible peg.
Banks and institutional buyers reward predictability.
What Sellers Should Avoid
❌ Last-Minute Manipulation
Buyers analyze month-by-month trends. Sudden shifts invite adjustments or mistrust.
❌ Ignoring the Peg Until Closing
By the time closing approaches, leverage is limited.
❌ Assuming Small Deals Don’t Have Pegs
Even SBA-backed transactions increasingly incorporate informal working capital expectations.
Why This Matters More in Larger Transactions
As deal size increases:
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Working capital adjustments become more precise
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Escrow holdbacks become common
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Post-close true-ups become enforceable
A poorly negotiated peg can quietly reduce net proceeds—even if headline price stays the same.
Final Thought
The working capital peg isn’t a technical footnote—it’s real money.
Sellers who understand and prepare for it:
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Avoid last-minute surprises
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Preserve negotiated value
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Increase buyer confidence
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Close with fewer concessions
Like many deal terms, working capital favors the prepared—not the rushed.
Michael Shea is a Business Broker and M&A Advisor with Transworld Business Advisors of Tampa, advising sellers on deal structure, working capital, and exit strategy across Main Street and lower middle market transactions.
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.