Working Capital Adjustments in M&A: Why Your Peg Number Determines Whether the Seller Owes You at Close

A working capital peg is the pre-negotiated baseline of net working capital (accounts receivable + inventory + other operating current assets minus accounts payable and other operating current liabilities) that the seller must deliver at closing. If actual closing net working capital comes in above the peg, the buyer tops the seller up dollar-for-dollar; if it comes in below, the seller writes a check back (usually from escrow). Get the peg wrong by 5% on a mid-market deal and you can hand the counterparty a seven-figure windfall before the ink dries.

Working capital adjustments appear in more than 90% of private-target acquisitions, according to the SRS Acquiom 2026 Working Capital Purchase Price Adjustment Study, which analyzed over 1,500 finalized PPAs totaling more than $385 billion in deal value. Almost every private deal you touch will have one — which means the peg number is one of the last places you want to be improvising.

What the Working Capital Peg Actually Does

The peg exists because signing and closing rarely happen on the same day. In the 30–120 days between them, cash comes in, inventory builds and depletes, and vendors get paid. The buyer priced the business assuming a "normal" level of operating liquidity would be inside it at close. The peg codifies what "normal" means. The true-up settles whatever gap develops.

The mechanical formula is:

Purchase Price Adjustment = Actual Closing NWC − Target NWC (Peg)
If the result is positive, the buyer pays the seller the surplus.
If the result is negative, the seller pays the buyer the deficit (typically pulled from an escrow held for exactly this purpose).

Two economic reasons the peg matters so much. First, it's a zero-sum lever — every dollar the peg moves up is a dollar of purchase price the seller loses. Second, unlike EBITDA multiples or synergy assumptions, the peg is settled in cash within roughly 60–90 days of closing, with no earnout contingency and no five-year horizon to dilute the impact.

Takeaway: Treat the peg like a second purchase price. It is one, mechanically. Do not delegate it to the accountants after the LOI is signed.

How to Calculate the Peg: TTM, 3-Month, and Same-Month-Prior-Year

There are three methodologies used in practice, and the one you pick can move the number by hundreds of thousands of dollars on a $5M deal.

Trailing twelve-month (TTM) average. Average the monthly NWC balances over the last 12 months. Best for stable businesses without heavy seasonality. This is the default in most middle-market deals and the one Schneider Downs, KMCO, and Auxo Capital Advisors all describe as the market-standard starting point.
Three-month average. Use the three most recent months. Best when the business is trending — growing quickly, contracting, or coming off a one-time event. Sellers of growing businesses often push for this because their NWC has structurally risen; buyers push back because the seller then gets credit for growth the buyer paid for in the multiple.
Same-month-prior-year. Use the NWC balance from the corresponding month in the prior year. Best for highly seasonal businesses — retail, agriculture, landscaping, tax prep — where NWC can swing 40–60% between peak and trough. A TTM average for a Christmas retailer closing in October would leave the buyer critically short of inventory financing.

Whatever method you use, run pro forma adjustments for known one-timers before you strike the average: unusual customer prepayments, delayed vendor runs to inflate cash at month-end, one-off inventory build for a launch, or non-recurring receivables from a customer that left.

Takeaway: Specify the methodology and the dollar amount in the LOI, not just the SPA. Leaving methodology open to later negotiation is how sellers lose deals — or hand buyers unrecoverable concessions — after all the leverage is gone.

The Chicago Bridge Warning: Why the SPA Language Matters More Than the Number

The single most important post-closing adjustment case in modern M&A is Chicago Bridge & Iron Co. N.V. v. Westinghouse Elec. Co., decided by the Delaware Supreme Court in June 2017. The facts are a masterclass in how a peg mechanism can turn into a $2 billion food fight.

Under an October 27, 2015 purchase agreement, Westinghouse acquired CB&I's nuclear construction subsidiary, CB&I Stone & Webster. The Target Net Working Capital Amount was fixed at $1.174 billion. After closing, Westinghouse's post-closing statement submitted a working capital calculation of negative $976.5 million — a delta of more than $2 billion against the peg — and demanded that Chicago Bridge pay.

The Court of Chancery initially ruled that the dispute-resolution mechanism required the parties to slug it out in front of the independent accountant, including on whether the historical financials were even GAAP-compliant. The Delaware Supreme Court reversed. It held the true-up process is a "narrow, subordinate, and cabined remedy" designed only to capture changes in the business between signing and closing — not a backdoor to re-underwrite the target's entire historical accounting.

Practical implications for anyone drafting a peg today:

Define the peg on the same accounting basis the seller used to produce the reference financials. Do not just say "in accordance with GAAP" — say "in accordance with the Accounting Principles set forth on Schedule X, applied consistently with the Reference Balance Sheet."
Include a specimen calculation as an exhibit. Every line item that made up the peg should reappear in the closing statement.
Draw a bright line between working-capital-eligible items and indebtedness/transaction-expense items. The most litigated fights are about classification, not arithmetic.

Takeaway: The peg number is only as good as the SPA language that defines it. A perfectly calculated peg attached to sloppy accounting principles is a Chicago Bridge waiting to happen.

Where the Money Actually Leaks: Six Real Adjustment Traps

Gibson Dunn's 2017 M&A Report on working capital adjustments and BDO's post-close guidance both catalogue the same recurring fights. Watch for these before you sign:

Cash vs. no-cash pegs. Most deals are done on a "cash-free, debt-free" basis, meaning cash is excluded from NWC. If your peg was built on a balance sheet that included cash and your SPA excludes it, you have a phantom hole equal to the average cash balance.
Deferred revenue. Is a customer prepayment a working capital liability or a form of debt-like item? Buyers want it treated as debt (bigger deduction from equity purchase price). Sellers want it in NWC (only affects true-up if it moves from the peg).
AR reserves. The seller's aging schedule and the buyer's collectability assumptions rarely match. Insist on a fixed reserve methodology as of a reference date, then apply it consistently at close.
Inventory obsolescence. Same problem as AR reserves, just harder to observe. Get a physical count as close to close as you can.
Accrued but unpaid PTO, bonuses, and commissions. Frequently excluded from the reference NWC but re-included at close. The Adaptive Capital Partners and Prairie Capital write-ups both flag this as a top-three seller giveback.
Timing games. Delaying a vendor payment run so cash sits higher at close, or accelerating collections. Buyers now routinely require an "ordinary course of business" covenant on payables and receivables for the last 30–60 days pre-close.

Takeaway: Build a line-by-line schedule of what is and isn't in NWC before you agree to a peg number. On a $20M enterprise value deal, misclassifying deferred revenue alone can shift $300K–$800K.

Building the Peg in Excel: A Repeatable Step-by-Step

Here is the process a senior deal-side analyst runs every time. It's not glamorous, but it survives contact with dispute resolution.

Pull 24 months of monthly balance sheets. Not year-end, not quarters — monthly. You need to see the seasonal pattern.
Strip out non-NWC items. Remove cash, debt, deferred tax, transaction expenses, and any item explicitly excluded by the SPA definition. Keep AR, inventory, prepaids, AP, accrued expenses, deferred revenue (if included), and other operating current liabilities.
Normalize each month. Add back one-off spikes and dips. Document every adjustment. If you cannot defend it to the arbitrator, do not book it.
Compute the average using the methodology you agreed to. TTM, 3-month, or same-month-prior-year. Show your work — the buyer's QoE team will replicate it.
Sensitivity-test the true-up. Model the closing NWC at ±10% around the peg. If a 5% miss moves 1%+ of enterprise value, insist on a collar or a dollar-for-dollar escrow.
Attach the spreadsheet as an SPA exhibit. "Illustrative Calculation of Target Net Working Capital" is the phrase you want. It binds everyone to the same starting method.

Takeaway: The seller who shows up to the peg conversation with a defensible 24-month schedule wins the negotiation before it starts. The one who shows up with a single trailing-twelve-month number pulled from the P&L pays the difference.

The Post-Close Timeline: What Happens in the 90 Days After You Sign

Most SPAs give the buyer 60–90 days after close to deliver a proposed closing statement. The seller then has 30–45 days to object. Any disputed line item goes to an independent accountant (typically a Big Four or top-tier regional firm named in the SPA) whose determination is final and binding.

Two data points to calibrate your expectations. The SRS Acquiom 2025 study found that buyers' proposed calculations were reviewed and ultimately accepted in roughly 7 out of 10 PPAs — meaning the seller who does not have the reference schedule pre-baked usually loses the fight. And the same study noted a continuing increase in working capital surpluses (i.e., sellers receiving cash back at true-up) as post-pandemic inventory normalization worked through the system.

If you're the seller, three procedural moves matter:

Retain your own accountant to prepare a preliminary closing statement before you receive the buyer's. Don't respond to their draft cold.
Log every objection in writing within the SPA's notice window. Missed deadlines are almost always fatal.
Escrow only the disputed portion, not the full true-up. Undisputed amounts should flow immediately.

Takeaway: The 90 days after close are not admin. They are a second negotiation with the same money at stake and less leverage than you had at signing. Staff them like you staffed the deal.

Bringing It Together

Every working capital adjustment reduces to the same three questions: What's the peg? How was it calculated? What's in it and what isn't? Deals that die on this issue — and every M&A practitioner has one they'd rather not talk about — die because one of those three answers was left ambiguous, or because the peg was set by someone who never read the SPA definition. Chicago Bridge was a $2 billion version of the same mistake a middle-market seller can make for $500K.

The good news is that this is one of the most templatable parts of the deal. A properly built peg model has the same architecture whether the deal is $5M or $500M: 24 months of monthly NWC, a defensible normalization schedule, a specimen calculation, and a tie-out to the SPA definition. If you're running deals without a repeatable Excel template for this, you are burning hours and leaving money on the table on every transaction.

ModelStack's IB & M&A template library includes a ready-to-use Working Capital Peg Analysis Excel model, a Quality of Earnings adjustment workbook, and an SPA closing statement template — the same building blocks a mid-market banker or buyside associate would assemble from scratch on every deal, pre-built and ready to plug your target's trial balance into. Skip the setup, keep the leverage.