Deal Structure June 23, 2026 By Dr. Connor Robertson

The Working Capital Peg: How to Avoid the Most Common Closing-Day Trap in Business Acquisitions

You've signed the LOI. You've survived due diligence. You've negotiated a purchase price you're comfortable with. Closing day is three weeks away and you're already planning the rebrand.

Then your attorney sends a revised closing statement. The purchase price is $200,000 higher than you expected. Why? The working capital peg.

This scenario plays out constantly in small business acquisitions, and it almost always catches first-time buyers flat-footed. Understanding working capital adjustments before you sign an LOI isn't a nice-to-have skill — it's a financial necessity.

What Is Working Capital, and Why Does It Matter at Closing?

Working capital is the difference between a business's current assets (cash, accounts receivable, inventory, prepaid expenses) and its current liabilities (accounts payable, accrued expenses, short-term debt). In simple terms, it's the fuel the business needs to operate day-to-day.

When you buy a business, you're not just buying the equipment and the customer list. You're buying a going concern — a machine that is already in motion. That machine needs fuel in the tank. The working capital peg is how buyers and sellers agree on how much fuel should be there at closing.

Here's the core principle: the seller runs the business up to closing, collecting receivables and paying bills in their normal course. By the time you take over, a certain amount of working capital should be present so you can hit the ground running without having to inject additional cash just to keep the lights on.

If the seller delivers less working capital than the agreed peg, they owe you the shortfall. If they deliver more, you owe them the surplus. Simple in concept, but a significant source of dispute in practice.

How the Peg Is Calculated: The 13-Week Average Method

The most widely accepted approach for setting the working capital peg is to calculate the average working capital over the trailing 12 to 13 weeks. This smooths out seasonal spikes and troughs and gives you a normalized baseline that reflects what the business actually needs to operate.

The formula:

Step 1: Pull the balance sheet for each of the last 13 weeks (month-end snapshots work for most small businesses).
Step 2: Calculate working capital for each period: Current Assets minus Current Liabilities.
Step 3: Average the 13 figures. That number becomes your peg target.
Step 4: Measure actual working capital at closing and settle the difference.

For a $2 million business generating $400,000 in SDE, working capital might land anywhere from $150,000 to $500,000 depending on the industry, billing cycles, and inventory requirements. That's not a rounding error — that's real money.

Four Common Traps (and How to Avoid Them)

Trap 1: The Seller Drains Receivables Before Closing

A motivated seller who knows closing is approaching may accelerate cash collection, letting accounts payable pile up and drawing down inventory. The business looks healthy right up until it doesn't — and you take over with an empty tank.

Protection: Include a covenant in your purchase agreement requiring the seller to operate the business in the ordinary course until closing. Define "ordinary course" explicitly: no acceleration of collections beyond normal terms, no deferral of vendor payments, no inventory drawdown below established levels.

Trap 2: Disputes Over What's Included in Working Capital

Is restricted cash included? What about the security deposit on the lease? Pre-paid insurance? Deferred revenue? Every item on the balance sheet is potentially a battleground if the purchase agreement is vague.

Protection: Attach a working capital schedule as an exhibit to your purchase agreement. List every line item that is included and excluded. Do this during LOI negotiation, not in the final drafting stage when both sides are exhausted and eager to close.

Trap 3: Seasonal Businesses and the Wrong Baseline Period

A landscaping company closing in November will have very different working capital than the same company closing in April. If you use a 13-week trailing average that captures the spring peak, you'll pay for working capital that evaporates the week after you close.

Protection: For seasonal businesses, negotiate a same-period-prior-year average instead of a trailing average. Compare the last three Novembers, not the last three months. This gives both parties a fair picture of what working capital looks like in the actual season you're stepping into.

Trap 4: The Earnout Seller Who Has No Incentive to Protect Working Capital

If you've structured an earn-out, the seller stays involved and earns future payments based on business performance. But between signing and closing, their incentives can shift. They know you're assuming the working capital risk, and they may not prioritize the same operational discipline they maintained when they owned 100% of the outcome.

Protection: Tie the earn-out baseline to post-closing working capital levels. If working capital falls below the peg during the earn-out period, the shortfall reduces the earn-out payment dollar for dollar. This keeps incentives aligned through the transition.

The Negotiation Framework: Setting the Peg Before LOI

Most buyers make the mistake of agreeing on price first and working capital later. By then, the seller has anchored on a total price and any working capital shortfall feels like a price cut — triggering resistance and re-trading dynamics that can kill deals.

The better sequence is to calculate working capital requirements during your initial financial review, before you submit an LOI. Then include the peg target in the LOI itself, not as a footnote but as a headline term alongside purchase price, down payment, and financing structure.

A well-structured LOI working capital clause looks like this:

Purchase price assumes delivery of normalized working capital, defined as the 13-week average of current assets minus current liabilities for the period ending [date], estimated at $[X]. The purchase price will be adjusted dollar-for-dollar at closing if actual working capital deviates from the target by more than $[threshold].

That threshold — the "collar" around the peg — is itself negotiable. A common structure is a $25,000 to $50,000 collar, meaning small deviations don't trigger an adjustment but larger swings do. The collar protects both sides from transaction costs over trivial fluctuations.

Post-Closing True-Up: How the Math Actually Settles

Because final financials aren't always available on closing day, most purchase agreements use an estimated closing balance sheet at closing, followed by a true-up process 60 to 90 days later. Here's how it typically works:

At closing, the parties use a best-estimate working capital figure, often prepared by the seller and reviewed by the buyer's accountant. The purchase price is adjusted based on this estimate. After closing, both parties work from the actual, audited closing balance sheet. If the actual figure differs from the estimate, the lower party writes a check to the higher party. Dispute resolution is usually handled by a mutually agreed-upon accounting firm.

The 60 to 90 day true-up window is important to negotiate carefully. Sellers want a short window; buyers often want more time to find accounting issues that weren't visible on closing day. A 60-day true-up period with a 10-day dispute notice requirement is a reasonable middle ground.

Working Capital in SBA-Financed Deals

When you're using an SBA 7(a) loan to finance the acquisition, working capital adds another layer of complexity. SBA lenders typically require that the acquisition include sufficient working capital to operate the business post-closing. They may require working capital to be included in the loan amount — which means the working capital peg directly affects your loan sizing and your down payment.

If you negotiate a low working capital peg to reduce the headline purchase price, you may find that your SBA lender reduces the loan amount accordingly, leaving you short of operating funds. Coordinate with your SBA lender early so the working capital peg is set at a level that supports both the deal economics and the loan structure.

The Bottom Line: Working Capital Is Part of the Price

Every dollar of working capital you receive at closing is a dollar you don't have to inject from your own pocket after closing. Every dollar shortfall is a dollar you'll need to fund somehow — from savings, from a line of credit, or from the business's early cash flows at the worst possible time.

Experienced acquirers treat working capital not as a technical accounting adjustment to be sorted out by lawyers, but as a core economic term of the deal — negotiated early, defined precisely, and protected contractually through closing.

For complete working capital negotiation frameworks, peg calculation templates, and real deal examples including how to handle disputed line items, get your copy of Creative Acquisitions.