Working capital peg, explained simply
The peg is typically set from the average of the last twelve monthly balances so that it reflects normal seasonal movement. Closing below the peg reduces the price. Closing above it increases the price.
Every dollar the peg moves is a dollar of price, which makes it one of the most negotiated items in a purchase agreement.
Monthly working capital against the peg
InteractiveAlder Creek Manufacturing, $ millions
Worked example
| $ millions | Oct | Nov | Dec | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net working capital | 6.8 | 7.0 | 7.5 | 7.2 | 6.9 | 6.8 | 7.0 | 7.3 | 7.6 | 7.8 | 7.6 | 6.9 |
Alder Creek monthly net working capital, October 2025 to September 2026. Fictional company; illustrative figures.
The twelve-month average is $7.2 million. The seller proposed $6.8 million, the lowest month end, which makes it easier to earn a price increase at closing. Diligence shows that the average reflects normal operations, so the parties agree a peg of $7.2 million.
How the peg is set
- Average of twelve monthly balances to capture seasonality
- Adjusted for one-off items and accounting corrections
- Calculated on exactly the same definition as the closing balance
Why it matters in a deal
The peg translates directly into price and is one of the most negotiated terms of the purchase agreement.
Red flags
- A peg based on a single month
- A peg calculated on a different basis from the closing statement
- A recent trend, such as slower collections, that the average does not reflect