When business owners think about selling their companies, they tend to focus on the purchase price. A business is worth $1 million, $2 million, or perhaps $5 million. The buyer makes an offer, the seller negotiates, and eventually they agree on a number.
But that number does not always tell the entire story.
One of the most important—and frequently misunderstood—parts of a business transaction is the working capital peg.
As a business broker with Transworld Business Advisors serving Tampa Bay, Clearwater, St. Petersburg, and Central Florida, I believe owners need to understand working capital before they begin negotiating a sale. Waiting until closing can create unnecessary surprises.
1. Understanding the Working Capital Peg
The working capital peg is the agreed target for the amount of qualifying operating working capital a seller is expected to deliver at closing.
Working capital is generally calculated as certain current operating assets minus certain current operating liabilities. Depending on the transaction, it may include accounts receivable, inventory, accounts payable, and accrued operating expenses.
Cash, debt, and certain other items are often treated separately.
The parties negotiate the target using historical financial information, operating requirements, seasonality, and the terms of the transaction.
2. How the Peg Affects Your Proceeds
Imagine you agree to sell your Tampa service business for $1.5 million.
The purchase agreement establishes a working capital target of $200,000.
At closing, the final calculation shows qualifying working capital of only $160,000.
If the agreement provides for a dollar-for-dollar adjustment, the purchase price could be reduced by $40,000.
That is a significant difference, especially when you consider that taxes, debt payoff, and transaction expenses may also affect your net proceeds.
The reverse may also be true if the business delivers more working capital than required and the agreement provides for an upward adjustment.
The point is not that every transaction uses the same formula. It is that the formula must be understood before the deal closes.
3. Why the Historical Average Matters
A working capital target should reflect how the business normally operates.
A company that experiences seasonal fluctuations may have substantially different receivables, inventory, and payables throughout the year.
Using a single balance sheet could produce a misleading target.
Buyers and sellers should examine monthly financial statements, understand unusual fluctuations, and determine whether recent operating performance reflects the company’s normal requirements.
4. What Sellers Should Negotiate Early
Before signing a letter of intent, sellers should understand:
- Which assets and liabilities count toward working capital.
- Whether cash and debt are excluded.
- How inventory and receivables are valued.
- How customer deposits and accrued expenses are treated.
- What historical period determines the target.
- How disputes over the final calculation will be resolved.
These issues belong in the economic negotiations, not just in the closing paperwork.
Final Thoughts
The working capital peg is not merely an accounting detail. It can directly affect the amount a seller receives and the cash a buyer needs to operate the acquired business.
If you are preparing to sell a business in Tampa Bay or Central Florida, start by understanding the financial mechanics of the transaction.
Visit Michael Shea’s business brokerage website or explore the free business owner resource to learn more about preparing for a successful exit.
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 476 transactions. His credentials include the IBBA Certified Business Intermediary®, and most recently, the prestigious Certified Exit Planning Advisor® (CEPA) credential. He is also a Florida Licensed Real Estate Broker and Business Brokers of Florida Board Certified Intermediary . Shea is a member of the VRMA and a recognized expert in property management and vacation rental management business sales