In most sell-side processes, the seller’s team prepares intensively for the valuation and barely at all for the net working capital (NWC) peg. That imbalance is expensive. The peg can move as much cash at close as a full turn on the multiple, and unlike the multiple, it is often conceded quietly, in a schedule the seller did not model until the buyer raised it.
This guide covers what the peg is, why it matters, how the target is built, where value leaks, and what a prepared sell-side team has ready before going to market. It assumes nothing about which tools or advisors you use.
What the peg is
Most mid-market deals are structured on a cash-free, debt-free basis with a normalized level of working capital delivered at close. The buyer is paying for a business that can keep operating the day after completion, which means a certain amount of receivables, inventory, and payables has to be left in it. That “normal” amount is the peg (also called the NWC target or benchmark).
At close, actual working capital is compared to the peg. If the business is delivered with more working capital than the peg, the seller is typically paid the difference. If less, the price is reduced. The mechanism is neutral in principle. The level of the peg, however, is a negotiation, and every dollar the peg is set too high is a dollar of the seller’s proceeds funding the buyer’s opening balance sheet.
Why it moves as much as a turn on the multiple
The numbers make the point. Consider a business at $4M EBITDA selling at 6.0x, a $24M enterprise value. A quarter-turn of hard-won multiple is worth $1M.
Now consider the working capital. A business like this might run $8M of net working capital. If the peg is set 12 to 15% above a fair normalized level, that is roughly $1M the seller leaves on the table at close, the same magnitude as the quarter-turn, conceded with far less resistance because it arrives late and looks technical.
The multiple is where sellers feel the fight. The peg is where the value often actually leaks.
How the target is built
A defensible peg starts from the business’s own history and adjusts it:
- Trailing-twelve-month average. The standard basis is the average monthly NWC over the most recent twelve months, not a single period-end snapshot. Twelve months smooths ordinary fluctuation and prevents either side from cherry-picking a favorable month.
- Seasonality. Businesses with seasonal build-ups (inventory ahead of a peak, receivables that swell in certain quarters) need the average to reflect the real operating cycle. Using a period that captures only the trough, or only the peak, distorts the peg in one side’s favor.
- Normalizing adjustments. Remove items that are not part of the ongoing working-capital need: non-operating balances, one-time or non-recurring items, related-party balances, cash-like or debt-like items that belong in the price mechanism rather than the peg, and any accounting classifications that would double-count.
- Definition discipline. The parties must agree precisely which accounts are in and out of the NWC definition. Ambiguity here is where post-close disputes are born.
Whoever builds this analysis first, with the cleanest support, tends to anchor the negotiation. If the seller’s side has not done it before launch, the buyer’s version becomes the starting point by default.
Where value leaks
- No seller-side analysis. The most common and most costly gap. Without a prepared TTM build, the seller reacts to the buyer’s number instead of proposing their own.
- Snapshot instead of average. Accepting a single period-end as the peg lets the counterparty pick the timing.
- Seasonality ignored. A peg set without regard to the operating cycle can systematically favor the buyer in a seasonal business.
- Loose definitions. Items that should sit in the price mechanism (cash, debt, debt-like items) drifting into the NWC calculation, usually against the seller.
- Late modeling. Treating the peg as a diligence-phase detail rather than a launch-phase deliverable, so there is no time to build a defensible position.
What to have ready before launch
A prepared sell-side team walks into the process with:
- A twelve-month NWC build by month, from the company’s own ledgers, with the operating cycle visible.
- A clear NWC definition, which accounts are included, which are treated as cash, debt, or debt-like, documented and consistent with how the numbers were normalized elsewhere in the materials.
- A schedule of normalizing adjustments with support for each, so the proposed peg can withstand a buyer’s review the same way the adjusted EBITDA should.
- A proposed peg the seller’s side is ready to put forward, rather than a blank to be filled in by the buyer.
The takeaway
The peg is not a technicality that gets sorted out near closing. It is a second price negotiation running quietly alongside the first, on ground the seller can prepare and the buyer expects them not to. Building the working-capital analysis before going to market, not when the buyer raises it, is one of the highest-return, lowest-visibility moves in sell-side preparation.