You agreed on $2.1M. The closing statement comes back at $2.05M. Or $2.18M. The difference is the working capital true-up — a cash adjustment based on whether the business delivered the agreed level of current assets at close. Most buyers encounter the working capital peg for the first time in the LOI negotiation and spend the next 60 days of due diligence wishing they understood it better. Here's what the peg is, how the true-up at close actually works, and what to negotiate before you sign the LOI.
What Net Working Capital Is and Why It's Negotiated
Net Working Capital (NWC) is current assets minus current liabilities. In a business context, it's the liquid cushion the business needs to operate — the cash, receivables, and inventory on hand minus the accounts payable, accrued expenses, and short-term obligations coming due.
Here's why it matters in an acquisition: when a buyer purchases a business, they expect to receive not just the assets and earning power, but enough working capital to run the business from day one. If the seller drains receivables, runs down inventory, and lets payables pile up before close, the buyer inherits a cash-starved business that needs an immediate capital injection to operate — even though they just wrote a large check to acquire it.
The working capital peg is the mechanism that prevents this. Buyers and sellers agree on a target NWC amount — the level the business should deliver at close — and adjust the purchase price up or down based on actual NWC at closing.
Why sellers resist large pegs: A higher NWC peg means the seller must leave more working capital in the business at close. Every dollar left in receivables and inventory is a dollar the seller doesn't receive directly — it's transferred with the business. Sellers prefer lower pegs; buyers prefer higher ones.
Why buyers resist low pegs: Receiving a business with inadequate working capital creates an immediate cash crisis. The buyer needs operating capital to pay employees, cover rent, and fulfill orders in the first weeks of ownership — before new receivables are collected.
For how NWC interacts with the LOI, see letter of intent to buy a business and the financial due diligence checklist.
How the Peg Is Set
The NWC peg is typically set at the trailing 12-month average NWC — a snapshot of what the business has historically carried to operate normally. The logic: neither party should benefit or be harmed by a fluctuation in working capital relative to historical norms.
How to calculate the peg:
1. Request monthly balance sheets for the last 12 months (or at minimum, 12 months of accounts receivable aging and accounts payable aging) 2. Calculate NWC for each month: (Cash + Accounts Receivable + Inventory + Prepaid Expenses) − (Accounts Payable + Accrued Liabilities + Current Portion of Debt) 3. Average the 12 monthly NWC figures 4. That average becomes the peg
What to include in NWC: Operating current assets and liabilities. Typically includes: cash (often set to zero — buyers don't buy cash, it stays with the seller), trade receivables, inventory, and accrued payables. Typically excludes: transaction-related costs, tax liabilities, debt, and owner distributions.
Common peg negotiating positions: Sellers often argue for a peg based on the most recent month-end (which they can optimize before the LOI). Buyers should insist on the 12-month average. Seasonally affected businesses should use 12 months regardless — if inventory peaks in Q4 and the deal closes in Q1, a single-month peg would shortchange the buyer.
Seasonality adjustment: For businesses with significant seasonal swings, a 12-month average may not reflect what the business needs at the specific close date. Some deals use a "target month" — what the business historically carries in the close month — rather than the simple annual average.
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Analyze deal economics →The True-Up at Close: Worked Example
The true-up is the final price adjustment made at closing based on actual NWC measured as of close date versus the peg.
Setup: - Agreed purchase price: $2,000,000 - NWC peg (agreed in LOI): $280,000 - Actual NWC at close (measured from final balance sheet): $245,000 - Shortfall: $35,000
Result: Buyer pays $2,000,000 minus $35,000 = $1,965,000. The seller delivered less working capital than agreed, so the price adjusts down by the shortfall amount.
If actual NWC at close were $315,000 (excess): Buyer pays $2,000,000 plus $35,000 = $2,035,000. The seller delivered more working capital than agreed — the buyer gets that extra value, so pays more.
How the true-up is processed: At closing, both parties use a preliminary closing statement based on an estimated final balance sheet. A post-close true-up period (typically 60–90 days) allows both parties to finalize the balance sheet using actual invoices, bank statements, and final receivable/payable balances. The final true-up reconciles the preliminary estimate to the actual NWC. The party that owes the other the difference pays it post-close.
Escrow provision: Many deals hold back a portion of the purchase price (commonly $50,000–$150,000) in escrow specifically to cover the NWC true-up. This protects the buyer from a seller who is unwilling to return money post-close. For how this interacts with earn-outs and other deal structure decisions, see earn-out business acquisition and asset vs. stock purchase.
What to Include and Exclude From NWC
The specific items included in the NWC calculation are negotiated — and the inclusion or exclusion of specific line items can move the peg significantly.
Standard inclusions (operating assets and liabilities):
| Item | Typically Included? |
|---|---|
| Trade accounts receivable | Yes |
| Inventory | Yes |
| Prepaid expenses (insurance, subscriptions) | Yes — if operational |
| Cash | Usually excluded — seller keeps cash |
| Accounts payable (trade) | Yes — as a subtraction |
| Accrued payroll and benefits | Yes — as a subtraction |
| Deferred revenue | Negotiated — buyer often excludes |
| Current portion of long-term debt | Excluded — usually paid off at close |
| Tax liabilities | Excluded — seller's responsibility |
| Owner loans to/from business | Excluded — cleaned up at close |
Deferred revenue deserves specific negotiation. If customers have prepaid for services not yet delivered, that's both a liability (the seller has an obligation to perform) and an asset (cash was already collected). Buyers often want deferred revenue excluded from the NWC calculation because they're inheriting the performance obligation without having collected the cash. Sellers argue the future performance is part of what the buyer is paying for. This is a negotiating point that belongs in the LOI.
Inventory quality: Inventory is included at book value, but book value may not reflect actual saleable condition. Stale, damaged, or obsolete inventory should be excluded from the NWC calculation during due diligence. Request an inventory audit — not just the book balance.
How to Negotiate the NWC Peg in the LOI
The NWC peg negotiation happens in the LOI — before due diligence. That means you're agreeing to a framework before you've seen the monthly balance sheets. Here's how to protect yourself.
Request monthly financials before signing the LOI. You need at least 6–12 months of balance sheet data to propose an intelligent peg. If the seller won't provide them before the LOI, include language that the peg will be "set during due diligence based on the trailing 12-month average NWC" and define the formula clearly.
Define the peg formula in the LOI, not just the number. "NWC peg of $280,000" is less protective than "NWC peg equal to the 12-month average of (accounts receivable + inventory + prepaid expenses) minus (accounts payable + accrued liabilities) based on the company's historical accounting policies consistently applied."
Specify the measurement date and methodology. How is NWC measured at close? Who prepares the closing balance sheet? What accounting standard applies? If the business uses cash-basis accounting, how are receivables measured? These questions need answers in the purchase agreement.
Include a true-up timeline and dispute process. Specify: preliminary closing statement delivered at close, final closing statement within 45 days, seller review period, dispute resolution if parties disagree on specific items. Without this, the true-up becomes a negotiation all over again post-close.
Set a floor and ceiling on adjustment. Some deals cap the NWC adjustment at a specific dollar amount to avoid large unexpected swings. A collar of ±$50,000 means the price adjustment is limited to that range regardless of the actual NWC at close. This protects both parties from extreme scenarios.
For the LOI template and key terms to include, see business acquisition letter of intent template. For the due diligence process that verifies NWC inputs, see the financial due diligence checklist.
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Generate my LOI →Frequently Asked Questions
Does SBA financing include working capital?
SBA 7(a) acquisition loans can include a working capital component — a defined amount built into the loan to fund operations post-close. However, this is separate from the NWC peg adjustment. The NWC peg ensures the business delivers adequate operational working capital at close. The SBA working capital component provides additional liquidity beyond what the business delivers. They're complementary, not substitutes. Discuss both with your lender when structuring the loan.
What happens if actual working capital at close is below the peg?
The purchase price is reduced by the shortfall. If you agreed on a $280,000 NWC peg and the business delivers $240,000 at close, you pay $40,000 less than the agreed price. This adjustment is calculated in the closing statement and settled either at close or in the post-close true-up period (typically 60–90 days). This is why the NWC peg is a buyer protection — it prevents the seller from running down working capital before close and leaving the buyer with a cash-short business.
Who calculates the NWC peg at close?
Typically the seller prepares the closing balance sheet (since they have access to the books), and the buyer has a review period to dispute specific items. Many purchase agreements require both parties to agree on the closing NWC calculation, with a neutral CPA or accounting firm as tie-breaker if they disagree. The specific process should be written into the purchase agreement — not left to verbal agreement after the LOI is signed.
The working capital peg is one of the most frequently misunderstood terms in a small business purchase agreement — and one of the most financially significant. A $40,000 NWC shortfall at close is a $40,000 price reduction you weren't expecting. Negotiate the peg formula before you sign the LOI, request monthly balance sheets to verify historical NWC during due diligence, and specify the true-up timeline and dispute process in the purchase agreement. The buyers who get surprised by working capital adjustments at closing are the ones who deferred this conversation to the last week before close.
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Model the working capital adjustment alongside purchase price, loan structure, and DSCR in the Deal Analyzer before you go under LOI.
Analyze deal economics →Acquisition Guide
Ready to buy a Business Coaching Practice business? See EBITDA multiples, deal structures, SBA eligibility, and active targets in our full buyer guide.
Business Coaching Practice Acquisition Guide