Why a peg exists
A buyer pays a headline price for a business that includes enough working capital to operate normally on day one. Without a peg, a seller could collect receivables aggressively, delay supplier payments and run down stock before completion, taking cash out of the business that the buyer has effectively paid for.
The peg sets the normal level. The completion accounts then measure the actual level, and the price moves by the difference.
How the peg is set
The peg is usually based on an average of month-end net working capital over the trailing twelve months, which smooths out seasonality. The definition matters as much as the number: which balance sheet lines are included, how deferred revenue is treated and whether accruals and tax balances are in or out.
The most reliable approach is to agree the definition, the included account codes and an illustrative calculation as a schedule to the purchase agreement, so that the completion calculation is mechanical rather than argued.
Deferred revenue in software and subscription deals
SaaS businesses that bill annually in advance often run negative working capital, because deferred revenue sits as a large current liability. Buyers sometimes argue that deferred revenue is debt-like and should be deducted from the price, on the basis that they must deliver the service without receiving further cash. Sellers argue it is an ordinary working capital item already reflected in the peg.
Where it lands is a negotiation, and it can move value by a meaningful share of annual revenue. It should be settled at letter of intent stage, not left to the purchase agreement.
Completion accounts versus locked box
A working capital peg belongs to the completion accounts mechanism, common in US deals, where the final price is adjusted after closing. In a locked box deal, more common in UK and European private equity, the price is fixed by reference to a historical balance sheet and there is no post-closing working capital true-up. Value protection instead comes from leakage covenants.
Worked example
| Scenario | Actual working capital | Adjustment to price |
|---|---|---|
| Shortfall | $520,000 | -$80,000 |
| On peg | $600,000 | $0 |
| Surplus | $650,000 | +$50,000 (if the agreement pays out surpluses) |
Frequently asked questions
- Can the adjustment be one-way?
- Yes. Some agreements only reduce the price for a shortfall, or only adjust outside a collar around the peg. Sellers should push for a symmetrical, dollar-for-dollar mechanism.
- Who prepares the completion accounts?
- Usually the buyer, within a set period after closing. The seller then has a review window and the right to dispute, with unresolved items going to an independent accountant.
- Is cash included in working capital?
- Normally no. Most deals are priced cash-free, debt-free, so cash and debt are dealt with separately and excluded from the working capital definition.
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