Net Working Capital in M&A: How the Peg Can Make or Break a Deal

Net working capital quietly decides how much cash actually changes hands when a deal closes. Two parties can shake hands on a headline price, yet the final wire amount shifts up or down depending on the working capital left inside the business. Buyers and sellers who nail down the mechanics tend to reach a smooth closing. The ones who gloss over them can end up arguing over the final number weeks later, and a strong deal starts to unravel. For buyers and sellers alike, understanding how the peg works is one of the highest-leverage things you can do before signing.

What Is Net Working Capital in M&A?

Net working capital in M&A is the difference between a target company’s current operating assets and its current operating liabilities, measured to reflect the everyday capital the business needs to keep running. It generally captures accounts receivable, inventory, and prepaid expenses, less accounts payable and accrued liabilities. Cash and debt usually sit outside the calculation, because most deals are structured on a cash-free, debt-free basis, meaning the seller keeps the cash and clears the debt at closing. What remains is the operational engine the buyer needs on day one to fund customers, suppliers, and payroll without an immediate cash injection of their own.

How the Working Capital Peg Is Set

The working capital peg is the normalized level of net working capital a buyer expects the business to deliver at closing. Deal teams typically set it by averaging monthly working capital across an average of trailing months, typically six to twelve months based on the business’s cycles and growth , which smooths out seasonal swings and one-time distortions. A landscaping company with a busy summer and a slow winter, for example, needs a peg that reflects the full annual cycle rather than a single strong month. A SaaS company experiencing rapid growth, on the other hand, needs a peg that reflects the working capital needs based on the recent high-growth period. The peg is negotiated, not handed down, and both sides lean on diligence findings to defend their number. A well-supported peg protects everyone from surprises after the ink dries.

How the Working Capital Adjustment Affects Price

The working capital adjustment is a dollar-for-dollar purchase price adjustment that measures actual working capital at closing against the agreed peg. If the business delivers more working capital than the peg, the buyer pays the seller for the excess. If it delivers less, the price drops by the shortfall. Say the peg is set at $5 million, and the company closes with $5.4 million of working capital. The seller earns an extra $400,000, because the buyer received more operating value than expected. The math sounds simple, yet the definitions behind each account drive the outcome, which is why the calculation deserves careful attention well before closing day.

Why Net Working Capital Is a Financial Due Diligence Priority

Net working capital ranks high on the diligence checklist because minor assumptions can move the price by seven figures. A single change in how receivables are aged or how accrued liabilities are estimated can shift the peg in a meaningful way. Diligence teams normalize the historical numbers, strip out nonrecurring items, and assess whether the trailing period truly represents the business. They also tie working capital back to earnings quality, since aggressive revenue recognition or delayed vendor payments can inflate the picture. A rigorous review gives both sides a defensible number and reduces the odds of a post-close fight over what the parties actually agreed to.

Common Working Capital Pitfalls in a Deal

Most working capital disputes trace back to vague definitions and rushed analysis. When the purchase agreement fails to spell out which accounts belong in the calculation and which accounting methods apply, the two sides can reach closing with very different expectations. Seasonality trips up deal teams that anchor the peg to a single strong quarter. Sellers sometimes stretch payables or accelerate collections in the weeks before closing to game the number, a practice diligence is built to catch. Inventory carried at the wrong value, uncollectible receivables left on the books, and inconsistent period-end cutoffs all create friction. Naming these issues early keeps them from turning into leverage at the negotiating table later.

How Insero Supports Working Capital Analysis in M&A

Working capital is where a lot of deals gain or lose real money, and at Insero, we make sure our clients know exactly where they stand. Our Financial Due Diligence services dig into the numbers behind the peg, normalize the trailing period, and pressure-test the assumptions that drive the adjustment. We work buy-side and sell-side, giving you responsive, hands-on guidance that fits the pace of your transaction and flags risks before they reach the closing table.

As experienced advisors, we tie working capital back to earnings quality and deal structure, then translate complex findings into practical next steps you can act on with confidence. Learn more about our Financial Due Diligence services, and schedule an appointment with our team to talk about your next deal.

Resources:

• corporatefinanceinstitute.com/resources/valuation/what-is-net-working-capital/