Working Capital: The Deal Term Your Balance Sheet Decides

You agree on a price. The letter of intent says one number, everyone shakes hands, and you start picturing the wire. Then, weeks into diligence, the buyer's team starts talking about a working capital target, and the amount at closing quietly moves. Nothing shady happened. You just met the part of the deal that gets decided by your balance sheet, and it moves real money in almost every sale. The owners it surprises are the ones whose books were not ready to answer for it.

What the working capital peg is, in plain terms

Most deals are priced cash-free, debt-free. The buyer does not keep your cash and does not take on your debt. You sweep the accounts and pay off the loans at closing. But the business still needs fuel to run on day one: receivables that will turn into cash, inventory on the shelves, minus the payables and accruals coming due. That fuel is net working capital.

The peg is the amount of working capital you agree to leave in the business at closing. Deliver more than the peg and the price adjusts up. Deliver less and it adjusts down, dollar for dollar. It is not a penalty. No buyer will fund the company's operations twice, once in the price and again the week after. The principle is fair. The number is where the money moves, and the number comes straight out of your financials.

Your balance sheet sets the target

The peg is almost always built from your trailing balance sheets, usually an average of net working capital over the last twelve months. That sounds mechanical. It is not, because three judgment calls sit inside it, and each one is decided by how good your books are.

• What counts. Does net working capital include deferred revenue, customer deposits, that truck you expensed? Every item in or out moves the peg, and the buyer's accountants will have an opinion on all of them. Clean, consistent categorization is your evidence.
• Which periods. A flat twelve-month average treats a seasonal business unfairly. Close in your heavy season and you may hand over far more inventory and receivables than your annual average, for free, unless your books show the seasonality clearly enough to argue for it.
• Whose numbers. If your books are cash-basis or your inventory counts are loose, the buyer restates everything to an accrual view during their quality of earnings work, and the peg gets set off their version, not yours.

That last point is the whole game. Whoever has the cleaner, more defensible financials sets the target. If you cannot produce reliable accrual-based monthly balance sheets, you are handing the buyer's team the pen.

Where owners lose money

The damage usually comes from a few repeat patterns, and every one of them traces back to reporting.

The owner who tightens collections hard in the months before closing feels efficient, but pulling cash out of receivables shrinks working capital, drops you below the peg, and gives the money right back at the true-up. The seasonal business pegged at a flat average donates its peak-season stock. The company with stale inventory or doubtful receivables watches the buyer carve them out of the calculation, lowering delivered working capital after the peg was already set. And almost every deal has a post-closing true-up, a recalculation 60 to 120 days later, which means the final price is not final on closing day, and the disputes get settled when the buyer already owns the books.

None of these are negotiating failures. They are reporting failures that showed up at the worst possible time.

How clean books put the peg on your side

The good news is that this is one of the most controllable parts of a deal, if the financial work is done before an offer instead of after.

• Get to clean accrual-based monthly balance sheets at least a year out. A consistent close is what lets you, not the buyer, define what normal working capital looks like.
• Know your own seasonal pattern in the numbers. If your reporting shows the swing clearly, you can argue for a seasonally fair peg instead of a flat average that costs you.
• Keep inventory and receivables honest. Reserve for the stale and the doubtful in your own books, so there are no surprises for a buyer to carve out later.
• Run the business normally through closing. No collection blitzes, no stretched payables, no inventory drawdowns. Gaming working capital before close almost always reverses at the true-up.

Do that work early and the peg becomes a number you can model and defend, not a lever the other side pulls after you have lost your leverage.

When it is time to negotiate the methodology into the LOI and run the process across real buyers, that is M&A work, and our partners at Texas Exit Advisors handle the deal side. Our job at Thryve is the part that happens first: a clean monthly close and a balance sheet reliable enough that the working capital target gets built off your numbers. This is general information, not tax or legal advice, and the peg is a contract term your attorney and CPA should shape. But the leverage starts with books you can stand behind. If a sale is on your horizon, let us get your balance sheet ready long before a buyer starts doing the math for you.