Working Capital Peg — Explained for M&A Interviews
2025-08-21
Technical
M&A
• 1 min readDefinition, mechanics, typical adjustments, and a quick table with examples; how it flows to cash and purchase price.
Working capital peg explained
The working capital peg is the normalized net working capital level the parties agree should be delivered at closing. After closing, actual working capital is compared to the peg; the purchase price is adjusted dollar‑for‑dollar for any shortfall or excess. This keeps the business "cash‑free, debt‑free" without starving operations.
How to calculate a peg
- Pick the definition: typically AR + Inventory − AP; sometimes includes other operating items
- Choose the lookback: LTM average, seasonally adjusted, and exclude one‑offs
- Normalize for unusual collections, stock‑outs, or vendor terms changes
- Document the exact components to avoid post‑close disputes
Example (normalized peg)
| Item | Avg (LTM) | Normalized | Adjustment | Notes |
|---|---|---|---|---|
| Accounts Receivable | $95m | $90m | −$5m | One‑time quarter‑end push |
| Inventory | $80m | $85m | +$5m | Safety stock reset post stock‑out |
| Accounts Payable | ($70m) | ($68m) | +$2m | Vendor terms normalized |
| Net WC Peg | $105m | $107m | +$2m | Buyer and seller agree to $107m |
If actual closing NWC is $102m vs a $107m peg, the purchase price is reduced by $5m. This flows through the cash paid at closing and the post‑close true‑up.
Downloads
Grab a peg calculator and checklist here.
Get the printable interview sheet for peg Q&A here.