Khaled Azar 
Working capital adjustments appear in more than 90% of private-target M&A transactions today, up from just 50% a decade ago, according to SRS Acquiom’s 2026 study of over 1,500 deals valued at $385 billion. Yet most sellers discover how this mechanism actually works only after signing the purchase agreement, when it’s too late to negotiate favorable terms.
The working capital adjustment is a post-closing true-up that can shift your final proceeds by hundreds of thousands of dollars. If you deliver less working capital at closing than the agreed-upon “peg,” the buyer deducts the shortfall from your purchase price, dollar for dollar. Deliver more, and you receive additional proceeds. Understanding how the peg gets set, what accounts get included, and where sellers commonly lose money is the difference between a clean exit and a costly surprise.
What Working Capital Actually Means in an M&A Deal
It’s not the same as your accountant’s definition.
In accounting, working capital is current assets minus current liabilities. In M&A, the definition gets more surgical. Most deals use a “cash-free, debt-free” basis, meaning all cash, short-term investments, and debt balances are excluded from the calculation. The buyer is purchasing the operating liquidity of the business, not your bank account or loan obligations.
The typical M&A working capital calculation includes:
- Current assets: Accounts receivable (net of reserves), inventory, prepaid expenses, and short-term deposits
- Current liabilities: Accounts payable, accrued expenses, payroll liabilities, accrued vacation, and deferred revenue
What gets excluded matters just as much: cash, debt, intercompany balances, and any deal-related items like accrued legal fees or transaction bonuses. The purchase agreement should explicitly list which accounts are in and which are out. In our experience advising sellers through dozens of transactions, the account-by-account definition is where disputes most often originate.
Working capital in M&A is a negotiated definition, not a GAAP calculation. The accounts included (and excluded) directly affect your final proceeds.
How the Target Gets Set: The Peg That Determines Your Adjustment
A 12-month average sounds fair until you see how buyers use it.
The “peg” or “target working capital” is the benchmark against which your closing working capital gets measured. Most deals use a trailing 12-month average as the starting point. The logic is straightforward: this should represent a “normal” operating level for the business.
But here’s where sellers get surprised. Buyers often push for the highest 12-month average they can justify, while sellers want the lowest defensible number. A $200,000 difference in the peg translates directly to $200,000 more or less in your pocket at closing.
Include a separate working capital escrow, typically around 1% of transaction value, held for 60-90 days post-closing (SRS Acquiom 2026).
Seasonal businesses face additional complexity. A retailer’s working capital in December looks nothing like June. If your business has cyclical patterns, using a straight 12-month average can set a peg that’s impossible to hit at certain times of year. The solution is matching the peg to the quarter or month when closing is expected, or using rolling averages that account for seasonality.
High-growth companies face the opposite problem. If your business grew 40% last year, your trailing average understates current working capital needs. Buyers know this and may accept a shorter lookback period (six months, or even three), but sellers should be cautious. Providing working capital that reflects past growth but not future growth protects you from overfunding the business at closing.
The peg methodology is negotiable. Seasonality and growth rate both affect whether a 12-month average is appropriate.
Where Sellers Lose Money: The Four Biggest Mistakes
We’ve seen each of these cost sellers six figures.
1. Not cleaning up the balance sheet before going to market. Stale inventory, uncollectible receivables, and understated reserves all get flagged during diligence. See the specific issues buyers hunt for in our breakdown of due diligence red flags sellers miss. If the buyer’s Quality of Earnings report identifies $300,000 in write-downs, that comes out of your working capital, which comes out of your purchase price.
2. Ignoring payroll accruals. Vacation pay, bonuses, and payroll taxes need to be current as of closing. Many sellers don’t update these accruals monthly, leading to surprises in the true-up. Some buyers prefer to treat payroll accruals as “debt-like items” (excluded from working capital), which sounds favorable but actually removes your ability to recover overfunding through the true-up process.
3. Deferred revenue misunderstandings. If your business collects payment upfront for services delivered over time, that liability sits on your balance sheet. In a cash-free, debt-free deal, you keep the cash but the buyer inherits the obligation to deliver. Without careful handling, this creates a windfall for the seller and a burden for the buyer. Expect pushback. Deferred revenue often gets treated as a debt-like item or backed out with a cash reserve.
4. Gaming the system too aggressively. Some sellers accelerate collections or delay vendor payments to inflate cash before closing. Sophisticated buyers see this immediately and will adjust the peg or true-up calculation accordingly. Worse, aggressive manipulation can trigger indemnification claims or purchase price holdbacks. The working capital mechanism is designed to be neutral; trying to game it usually backfires.
The True-Up Process: What Happens After Closing
60 to 90 days of waiting, then the final math.
At closing, sellers provide an estimated balance sheet with a preliminary working capital calculation. The purchase price gets adjusted based on this estimate versus the peg. But this isn’t final.
Within 60 to 90 days post-closing (as specified in the purchase agreement), the buyer prepares a final working capital statement using actual closing-date figures. This is the true-up. Any difference from the preliminary calculation triggers a dollar-for-dollar adjustment, typically satisfied from an escrow funded by the seller at closing.
| Phase | What Happens | Seller Action |
|---|---|---|
| LOI | Peg methodology and accounts discussed | Define working capital calculation, push for favorable peg |
| Due Diligence | Buyer’s QoE reviews historical working capital | Clean up reserves, update accruals, document anomalies |
| Signing | Working capital schedule locked into purchase agreement | Review account-by-account definitions, negotiate exclusions |
| Closing | Estimated working capital vs. peg determines preliminary adjustment | Prepare accurate closing balance sheet |
| True-Up (60-90 days) | Final calculation, escrow release or holdback | Review buyer’s calculation, dispute if necessary |
If you disagree with the buyer’s final calculation, most purchase agreements provide a dispute window (often 30-45 days) for negotiation. Unresolved disputes go to an independent accountant whose scope is limited to the methodology already specified in the agreement. This is why getting the definitions right at signing matters more than winning the argument post-closing.
The true-up is mechanical. Your leverage exists before signing, not during the post-close dispute process.
Negotiating the Peg: What Actually Works
Tactics from deals we’ve advised.
Start with a sell-side Quality of Earnings. A proactive QoE gives you control over the working capital narrative. You identify adjustments before the buyer does, and you can defend a peg based on normalized, adjusted figures rather than raw accounting data. In one transaction, our sell-side QoE identified $180,000 in normalizing adjustments that reduced the working capital target, preserving that amount in the seller’s proceeds.
Negotiate collars or bands. Some deals include a “de minimis” threshold where small deviations from the peg don’t trigger adjustments. A plus-or-minus 2% band around a $2 million peg means deviations of $40,000 or less get absorbed without dollar-for-dollar adjustment. This reduces post-closing friction for minor differences.
Exclude volatile accounts when justified. If a particular account (like a large prepaid insurance policy or a seasonal accrual) distorts your trailing average, argue for exclusion. The key is demonstrating that including it produces a peg that doesn’t reflect normal operating conditions.
Match the peg to expected closing. If you know closing will occur in March, use a peg methodology that reflects Q1 working capital patterns, not the full-year average. This prevents a mismatch where you’re measured against an average driven by a peak season that already passed.
Some deals use a “locked-box” structure instead of a post-closing adjustment. More common in European transactions, the locked-box model is gaining traction in U.S. middle-market and PE deals. The buyer accepts working capital as of a reference date, with no true-up. This offers price certainty but requires strong trust and tight “leakage” covenants.
A Deal That Almost Went Wrong
How a working capital dispute nearly cost $400,000.
We advised a SaaS company where the trailing 12-month working capital average was $1.8 million. The buyer proposed using the average as the peg, which seemed reasonable. The problem: the company had just completed a major annual customer billing cycle in January, and the seller expected to close in March.
January’s deferred revenue spike pushed the average up. By March, that deferred revenue had been recognized, and the closing working capital came in at $1.4 million, $400,000 below the peg.
The fix came during LOI negotiation: we proposed a peg based on the Q1 average of the prior two years, which produced a $1.45 million target. The buyer agreed because it still reflected a “normal” operating level. At closing, the seller delivered $1.4 million in working capital, resulting in a $50,000 adjustment instead of $400,000.
By matching the peg methodology to the expected closing period, not a trailing average distorted by annual billing.
What to Do Before Going to Market
The preparation that prevents surprises.
Before you engage with buyers, get your working capital house in order:
- Update all accruals monthly. Vacation, bonus, payroll taxes, and other accrued expenses should reflect current liabilities, not year-end adjustments.
- Reserve for bad debt realistically. If you have aged receivables over 90 days that won’t collect, reserve or write them off now. Buyers will flag them regardless.
- Address obsolete inventory. Excess or slow-moving inventory gets marked down during QoE. Better to take the write-down on your terms.
- Document seasonality. If your working capital fluctuates predictably, prepare a monthly analysis showing the pattern over 2-3 years. This supports negotiating a peg that matches your closing window.
- Know your average. Calculate trailing 6-month, 12-month, and 24-month averages. Understand which methodology favors you and why.
Working capital adjustments aren’t designed to extract value from either party. But the party that understands the mechanics better usually ends up with more favorable terms. In our experience, that’s almost always the buyer, because buyers do this repeatedly and sellers do it once. Bringing an experienced M&A advisor into the process early changes that dynamic. For a complete picture of how working capital fits into the sale timeline, see our guide on how to sell a SaaS company.
Working capital preparation starts months before going to market, not during LOI negotiation.
Frequently Asked Questions
How is working capital calculated in an M&A transaction?
M&A working capital is typically calculated on a cash-free, debt-free basis: current assets (accounts receivable, inventory, prepaids) minus current liabilities (accounts payable, accrued expenses, deferred revenue), excluding cash, debt, and deal-related items. The specific accounts included are negotiated and documented in the purchase agreement.
What is a working capital peg or target?
The peg (or target) is the benchmark level of working capital the seller agrees to deliver at closing. It’s typically based on a trailing 12-month average of adjusted working capital. If actual closing working capital exceeds the peg, the seller receives additional proceeds; if it falls short, the purchase price is reduced dollar-for-dollar.
Can working capital adjustments reduce my sale price after closing?
Yes. The true-up process, occurring 60-90 days post-closing, compares actual working capital to the preliminary estimate. If working capital is lower than estimated, the shortfall is typically deducted from an escrow funded by the seller. According to SRS Acquiom, 75% of deals include a separate working capital escrow for this purpose.
What is a locked-box structure?
A locked-box structure fixes the working capital amount as of a reference date prior to closing, with no post-closing true-up. The buyer assumes risk of working capital fluctuations in exchange for price certainty. Leakage covenants prevent sellers from extracting value between the locked date and closing. This approach is more common in European deals but is gaining traction in U.S. middle-market transactions.
How can I negotiate a more favorable working capital peg?
Start by conducting a sell-side Quality of Earnings to identify normalizing adjustments. Propose a peg methodology that matches your expected closing period if seasonality is a factor. Negotiate collars or bands that absorb minor deviations. Document why specific account exclusions are justified. The key is engaging early, during LOI negotiation, when you have the most leverage.
Get the Working Capital Right the First Time
Expert guidance before you sign, not after.
Working capital adjustments shouldn’t be a post-closing surprise. We’ll help you understand the mechanics, prepare your balance sheet, and negotiate a peg that reflects your business’s reality.