Working capital peg: how buyers protect themselves at closing
Short answer
A working capital peg is a target level of net working capital (typically receivables plus inventory minus payables and accrued expenses) that the seller must deliver at closing. If the actual amount is below the peg, the price goes down; if above, it goes up. It stops a seller from collecting receivables, delaying bills and running down inventory just before you take over.
Many small asset deals skip the peg because the seller keeps receivables and pays payables. Then you need to fund working capital yourself, so budget for it.
Working capital is the money tied up in running the business day to day: customers who owe you, stock on the shelves, minus what you owe suppliers and staff. A business with $400,000 of earnings might need $80,000 of working capital just to function. If that money disappears at closing, you discover it the first time payroll is due before customers pay.
How buyers get hurt
In the months before closing, a seller can, without doing anything illegal:
- Push hard to collect every receivable, then keep the cash.
- Slow-pay suppliers so payables pile up, which you then inherit or the relationship sours.
- Let inventory run down, so you have to restock on day one.
- Take customer deposits for work you'll have to deliver.
The business looks the same on closing day. It just has less fuel in the tank.
How a peg works
- Define working capital in the APA: which accounts count (receivables, inventory, prepaid expenses, payables, accrued wages, customer deposits) and which don't (cash and debt, usually).
- Set the peg, typically the trailing-12-month average, adjusted for seasonality.
- Estimate at closing and adjust the price provisionally.
- True up within an agreed period once the real closing balance sheet is prepared, with a dispute mechanism.
Illustrative example, not a real business
A business's net working capital averaged $120,000 over the past year: receivables $90,000, inventory $70,000, payables and accruals $40,000. The parties set the peg at $120,000.
At closing, receivables are $60,000 (the seller collected aggressively), inventory is $55,000 and payables are $45,000. Net working capital is $60,000 + $55,000 − $45,000 = $70,000. That's $50,000 below the peg, so the price is reduced by $50,000.
Small deals without a peg
Most Main Street asset deals use a simpler model: the seller keeps cash and receivables and pays its own payables, inventory is counted and bought at cost on top of the price, and the buyer starts with an empty bank account. That's fine, as long as you plan for it:
- Estimate how much cash the business needs between paying for things and getting paid. Look at monthly receivables, payables and inventory on the balance sheets.
- Include working capital in your financing. SBA change-of-ownership loans can include it, and lenders must analyze working capital adequacy for at least the next 12 months.
- Agree how customer deposits and prepaid services are handled (usually a credit to you at closing).
- Set an inventory count method, date and cap in the LOI.
- Decide who collects receivables that arrive after closing and how they're passed back.
Write it into the LOI
Working capital disputes are hard to win after closing and easy to prevent before. One sentence in the LOI ("Seller will deliver net working capital of $X at closing, with a dollar-for-dollar adjustment") or ("Seller retains cash and receivables and pays all payables; inventory purchased at cost per joint count") saves a lot of argument. See letter of intent.
Inventory when buying a business: count, value and price
In a small business sale, inventory is either included in the price at an agreed level or paid on top of the price based on a physical count at closing. Either way, agree in the LOI how it will be handled, count it close to closing with both sides present, value it at cost (not retail), and exclude or discount damaged, expired and slow-moving stock. Check inventory against the books, because overstated inventory also overstates profit.
Inventory is cash sitting on shelves. Pay for the right amount, at the right value, and make sure the books reflect what's really there.
Included vs on top
Illustrative example, not a real deal
Listing A asks $500,000 including $60,000 of inventory. Listing B asks $440,000 plus inventory at cost, expected to be about $60,000. They look different but could cost the same. What matters is how the inventory is counted and valued, and what happens if it's above or below the expected level.
Counting and valuing
- Agree the method in the LOI: included level or count at closing.
- Count within a day or two of closing; both sides present or a third-party counter.
- Value at cost from recent supplier invoices.
- Exclude damaged, expired, obsolete and consigned items.
- Agree a cap or target range.
Inventory and the earnings
Compare book inventory with an actual count during diligence. A large gap can mean shrink or a profit figure that was flattered. See reading a P&L
Accounts receivable when buying a business
In most small business asset purchases, the seller keeps the accounts receivable (money customers owe for past work) and collects it after closing, while you start with none. That means you need working capital to cover payroll and costs until your own invoices are paid. Alternatively, receivables can be included and paid for, often as part of a working capital target. Either way, review the aging report, how fast customers pay, and how collections after closing will be handled.
Receivables are earned income that hasn't arrived yet. Who gets them, and how you fund the business until your own money comes in, are easy to overlook.
What to review
| Item | Why |
|---|---|
| Aging report at several dates | Collection speed and overdue trend |
| Days sales outstanding | Your cash gap after closing |
| Bad debt write-offs | Quality of customers |
| Largest balances | Concentration, disputes |
| Factoring or MCA agreements | Receivables already sold or pledged |
In the deal
- Agree how post-closing payments are sorted and forwarded.
- Include working capital in your financing request.
- Notify customers of new payment details.
What goes into working capital, and what doesn't
| Usually included | Usually excluded |
|---|---|
| Accounts receivable, net of bad debts | Cash (the seller keeps it in most small deals) |
| Inventory, if not priced separately | Debt and interest, paid off at closing |
| Prepaid expenses that benefit you | Income tax balances |
| Accounts payable and accrued expenses | Amounts owed to the seller or related parties |
| Customer deposits and deferred revenue | Transaction costs |
Write the definition into the purchase agreement with a sample calculation using real balance sheet numbers, so both sides agree how the closing figure will be worked out.
SBA deals and the true-up
SBA Information Notice 5000-882227, effective October 1, 2026, clarifies that working capital true-ups are not seller rebates. That matters because SBA rules treat rebates and earnouts differently. Ask your lender and attorney how the true-up will be documented and paid in an SBA-financed deal.
Ask for monthly balance sheets for at least 12 months before you agree a peg. A peg set from one year-end balance sheet can be distorted by seasonality or by the seller collecting receivables and delaying payables before the sale. An average of monthly balances, adjusted for known one-offs, is usually a fairer measure of what the business normally needs to run.
Frequently asked questions
How is the working capital peg set?
Usually as the average net working capital over the last 12 months, adjusted for seasonality and any unusual items, so it reflects what the business normally needs to run.
Do small business sales use a working capital peg?
Larger deals usually do. Many Main Street asset deals don't: the seller keeps cash and receivables and pays its own payables, and inventory is counted and paid for separately. In that case, the buyer must bring or finance working capital.
What happens after closing with a peg?
The parties calculate actual working capital at closing, usually within 60 to 120 days, and the price is adjusted up or down. The APA should set the method, the timeline and how disputes are resolved.
Can working capital be financed with an SBA loan?
SOP 50 10 8.1 lists working capital as an eligible use of proceeds in a change-of-ownership loan, and it counts toward the project cost on which your equity injection is based.
Is inventory included in the asking price?
Listings differ. Some include a stated amount; others say "plus inventory." Confirm in writing and in the LOI.
How is inventory valued at closing?
Usually at the seller's cost from supplier invoices, based on a physical count, with obsolete or damaged items excluded or discounted.
Sources
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.