What is a working capital peg?

Why does a deal need a peg at all?

A business needs a normal amount of receivables, inventory and supplier credit to run. The price you agree assumes that normal amount comes with it. Without a peg, a seller could collect receivables hard, delay paying suppliers and run down inventory in the months before closing. The seller keeps that cash. You inherit a business that needs a cash injection on day one.

The peg fixes this. It says what "normal" is in dollars. If the seller delivers less, the price goes down. If the seller delivers more, the price goes up.

How is net working capital defined for the peg?

The definition matters as much as the number. It is written into the purchase agreement, usually with an illustrative calculation attached.

• Usually included as assets: accounts receivable, net of a reserve for doubtful accounts; inventory at cost; prepaid expenses.
• Usually included as liabilities: accounts payable; accrued expenses; accrued payroll and vacation; customer deposits and deferred revenue.
• Usually excluded: cash; bank debt and seller notes; income taxes; transaction fees; balances owed to or from the owner or related companies.

Also agree the accounting rules. The closing calculation should use the same policies as the historical numbers used to set the peg. Otherwise the seller can change a reserve and move the result.

How is the peg set?

1. Calculate net working capital at each month-end over the past year, using the agreed definition.
2. Remove one-time items, such as a large prepayment or a disputed invoice.
3. Average the months. Averaging smooths out seasonality.
4. Adjust for growth. A growing business needs more working capital than its past average shows.
5. Agree a collar if you want one: a small band around the peg where no adjustment is paid.

Expect negotiation. The seller wants a low peg. You want a high one. A quality of earnings provider can build the monthly analysis for you. Many include it in scope if you ask.

How does the true-up work after closing?

• At closing: the seller provides an estimated closing statement. The price paid at closing is adjusted for the estimate.
• After closing: within an agreed number of days, the buyer usually prepares the final closing statement from the books.
• Review: the seller has a set period to object to specific items.
• Disputes: unresolved items go to an independent accountant named in the agreement. That accountant decides only the disputed items.
• Payment: the difference is paid by the party that owes it, often from a holdback or escrow.

Does a peg work with an SBA loan?

Yes, with care. As of October 2026, under SBA SOP 50 10 8.1:

• SBA rules prohibit seller earnouts, meaning payments contingent on future performance. A peg adjustment measures the balance sheet at closing, not future results. Still, show your lender the clause and agree how any post-closing payment is made.
• Every change-of-ownership loan needs an independent business valuation, and total debt is capped at appraised value. An upward adjustment that pushes the price above the valuation must be paid from buyer cash.
• For Initial Acquisitions and Business Expansions with a price of $3M or more, the lender commissions a quality of earnings report. Its earnings figure is used in the coverage test.
• Working capital is part of total project costs, so it affects your 10% minimum injection.

Worked example: a $3M acquisition with a $400,000 peg

Illustrative figures.

• Average monthly net working capital over the past year: $400,000. Agreed peg: $400,000.
• Closing current assets: receivables $310,000 + inventory $150,000 + prepaid $10,000 = $470,000.
• Closing current liabilities: payables $95,000 + accrued expenses $35,000 = $130,000.
• Closing net working capital: $470,000 − $130,000 = $340,000.
• Shortfall: $400,000 − $340,000 = $60,000.
• Adjusted price: $3,000,000 − $60,000 = $2,940,000.
• With a $10,000 collar, the shortfall is still outside the band. Whether the full $60,000 or only the $50,000 beyond the collar is paid is a drafting choice. Decide it in the agreement.

Without the peg, the seller keeps the $60,000. You put that much of your own cash back into the business in the first month.

Where these numbers come from: The switch from SDE to EBITDA above about $1M of earnings is from Beancount's SDE multiples guide. The SBA valuation cap, the $3M quality of earnings threshold and the 10% injection are from SOP 50 10 8.1, summarized by Beancount's SOP 50 10 8.1 guide; the earnout prohibition by Cantrell Firm. Quality of earnings costs are from the Big Deal Small Business deal cost survey and Searchfunder on the SBA QoE requirement. SOP 50 10 8.1 applies to loans numbered on or after October 1, 2026; lender practice under it is still settling and these are secondary summaries, so confirm current terms with your SBA lender.

Related questions

Is a working capital adjustment the same as an earnout?

No. An earnout pays the seller more if the business performs after closing. A peg adjustment corrects the price for the balance sheet delivered on closing day. Lenders still review both, so show yours the clause.

Do I need a peg if I'm buying a $500,000 business?

Usually not. In most Main Street deals the seller keeps cash and receivables and you fund your own working capital. You still need an inventory count and a credit for customer deposits. See what's included when you buy a business.

What does a quality of earnings report cost?

In one buyer survey, the median was $40,000, and a "QoE-lite" ran under $10,000. Proposals for SBA deals ranged from $7,500 to over $30,000. Ask for the working capital analysis in scope.

Can a seller game the peg?

Through definitions, yes. Watch reserve changes, reclassified liabilities and excluded accruals. Tie the closing calculation to the same accounting policies used to set the peg.

What comes next

Working capital is one liability you inherit at closing. The lease is usually the largest: what happens to the lease when you buy a business? If you plan to buy again, keep the peg workpapers, because the same definitions become the template for deal two.

Related articles

• Are inventory and receivables included when you buy a business?
• Asset purchase or stock purchase: which should a buyer choose?
• What happens to the lease when you buy a business?
• Do you need a quality of earnings report to buy a small business?
• How do you build a holding company for acquisitions?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.