Working Capital Peg Basics: How NWC Affects Purchase Price at Close
The peg looks like a footnote until closing day. Here is how net working capital targets are set, measured, and disputed.
Net working capital (NWC) adjustments are one of the most negotiated mechanics in middle-market M&A. The working capital peg sets the expected NWC level at closing. Variances flow dollar-for-dollar into the final purchase price.
Defining net working capital
In transaction contexts, NWC usually means current assets minus current liabilities, excluding cash, debt, and tax items per the purchase agreement definition. What counts as "current" and which accounts are in or out is deal-specific. There is no universal GAAP peg.
Typical inclusions: accounts receivable, inventory, prepaid expenses, accounts payable, accrued expenses. Typical exclusions: cash, line of credit, capital leases, income taxes payable, deferred revenue (sometimes).
Setting the peg
Buyers often propose a peg based on a trailing average, for example average monthly NWC over the last twelve months, sometimes seasonally adjusted. Sellers push for periods that reflect normalized operations or exclude anomalies (large inventory build, one-time payables).
The peg is fixed in the purchase agreement, with a collar or true-up mechanism:
- Closing NWC below peg → buyer receives a purchase price reduction
- Closing NWC above peg → seller may receive additional consideration
Where disputes start
Peg fights rarely happen at signing. They surface at the closing statement when accountants disagree on:
- Cut-off and AR collectibility reserves
- Inventory obsolescence and slow-moving SKUs
- Accrued bonuses or commissions not yet recorded
- Deferred revenue and contract liabilities (especially in SaaS)
Seasonal businesses add complexity: a December close for a retailer may look nothing like a July average.
Diligence best practices
Strong NWC diligence includes:
- Monthly NWC roll-forward for 24+ months
- AR/AP aging tied to GL
- Inventory listings with obsolescence history
- Clear mapping from trial balance accounts to the peg definition
- Management representation on unrecorded liabilities
Document the methodology before close so the post-close true-up is arithmetic, not archaeology.
Takeaway
The peg protects the buyer from funding operations the seller ran down before exit. Sellers should negotiate the measurement period and definition as carefully as the headline multiple.
Read more in our FAQ on working capital pegs.
Model NWC and peg variances automatically
aiassure calculates normalized NWC from mapped balance sheet accounts, tracks DSO/DIO/DPO, and documents peg methodology in the working capital module.