A working capital peg is an agreed target used to compare the business’s working capital at completion with the level specified in the sale agreement. Where the agreement provides a price adjustment, a shortfall or excess can change the consideration.
This article focuses on the calculation and its effect on price. For setting the target and preparing the historical evidence, see our separate working capital peg preparation guide. The examples below are illustrative contract mechanics, not a standard term imposed by UK law.
What the peg measures
The agreement defines which balances count as working capital and how they are measured. Operating receivables, stock and payables may be relevant, but the treatment of taxes, provisions, deferred revenue and other items must be specified.
Cash, financing debt and working capital can appear in separate parts of the pricing bridge. Keep those definitions consistent. Calling a deal cash-free and debt-free does not by itself settle every balance-sheet classification.
A simple working capital adjustment formula
For a hypothetical agreement with a pound-for-pound adjustment:
Working capital adjustment = actual completion working capital − agreed peg.
A positive result increases consideration and a negative result reduces it, subject to the rest of that agreement.
| Illustrative case | Actual working capital | Agreed peg | Price adjustment |
|---|---|---|---|
| Shortfall | £420,000 | £500,000 | −£80,000 |
| On target | £500,000 | £500,000 | £0 |
| Excess | £560,000 | £500,000 | +£60,000 |
If the pre-adjustment consideration in this simplified example is £4 million, the three outcomes are £3.92 million, £4 million and £4.06 million. Other cash, debt, consideration or completion adjustments are excluded from the example. Do not apply an EBITDA multiple to these adjustments unless the contract actually requires it.
Why the agreement matters: a published UK tribunal decision
In McEnroe and Newman v HMRC [2023] UKUT 255 (TCC), the published decision reproduces a transaction’s provisions for a pound-for-pound working capital adjustment and contract-specific completion-account policies. It also records the exclusion of a specified bank loan from net current assets.
That is an example of negotiated wording in one transaction, not a rule that its definitions apply to every sale. It illustrates why the financial calculation and the legal drafting need to be read together.
Worked example: building the completion balance
Assume, solely for illustration, that the contract includes £700,000 trade receivables, £100,000 inventory and £300,000 operating payables. On those assumed definitions, working capital is £500,000. Against a £500,000 peg, the adjustment is zero.
Now assume £40,000 of those receivables must be excluded under the agreed collection or provisioning policy. Working capital becomes £460,000 and the hypothetical pound-for-pound adjustment is −£40,000. The conclusion comes from the agreed policy, not merely from the balance-sheet label.
Items to define before signing
| Item | Question to settle |
|---|---|
| Receivables | Which aged, disputed or uncollectible amounts are excluded or provided for? |
| Inventory | How are obsolete or slow-moving balances measured? |
| Payables and accruals | Which unpaid operating costs belong in the completion period? |
| Deferred revenue | How are future delivery obligations reflected without double counting? |
| Tax, cash and financing | Which pricing category includes each balance? |
| Accounting policies | What is the order of priority between specific policies and general accounting requirements? |
Prepare a sample calculation using actual account codes, with a reconciliation to the management accounts. If an item appears in both the debt schedule and working capital, resolve the overlap before it affects the price.
The target should reflect the agreed operating position
A historical average may be a starting point for negotiation, but growth, seasonality, billing cycles and unusual events can make a simple average misleading. The seller and buyer need to agree the target and its supporting evidence.
This article does not prescribe a twelve-month average or a fixed percentage of revenue. For the preparation work behind a proposed target, use the working capital peg guide.
Agree the completion-accounts process
- Who prepares the first calculation and from which records?
- What are the submission and review deadlines?
- Which accounting policies and valuation rules take priority?
- How are objections documented and resolved?
- Who pays any adjustment, when, and subject to what limits?
The finance team should model the wording while transaction lawyers document the mechanism. A clear calculation cannot cure ambiguous drafting, and clear drafting still needs reliable underlying records.
Prepare the evidence before completion
Reconcile receivables, inventory, payables and accruals regularly. Retain support for estimates and unusual adjustments. Avoid treating delayed supplier payments or accelerated collections as an automatic value improvement; the agreed mechanism determines their effect.
Our due diligence preparation and independent valuation services address different parts of transaction preparation. A valuation conclusion and the completion-price calculation should be kept distinct.
Frequently asked questions
What is a working capital peg?
It is the target amount of working capital defined in a transaction agreement. Under a completion-accounts mechanism, the price may be adjusted by comparing actual completion working capital with that target, using the contract’s definitions.
How does a working capital shortfall affect the price?
If the agreement provides a pound-for-pound adjustment, actual working capital below the target reduces consideration by the shortfall. Other contracts may contain different mechanics, thresholds or limits.
Is cash included in working capital?
Use the transaction definition. Cash and financing debt may be treated separately from operating working capital, but there is no single definition that can be assumed for every deal.
Should a working capital adjustment be multiplied by EBITDA?
Not where the agreement specifies a pound-for-pound adjustment. An earnings multiple used to agree enterprise value does not automatically apply to a separate working capital adjustment.
Does every acquisition use a working capital peg?
No. The pricing mechanism is negotiated. Read the actual agreement rather than assuming every transaction has a post-completion true-up.
Can deferred revenue be included?
It depends on the definitions, obligations and agreed pricing treatment. Review it alongside cash and debt-like items so the same economic obligation is not counted twice.
How do I reduce the risk of a dispute?
Agree definitions and accounting policies, prepare a worked calculation, reconcile the underlying balances, and define the preparation, objection and dispute process before signing.
Prepare before the transaction
We can help prepare the working capital schedules, identify classification questions and model the proposed price adjustment alongside your legal advisers.
About the author: Kishen Patel ACA, founder of Consult EFC, is an ICAEW Chartered Accountant with Big Four and investment banking experience. View his ICAEW profile.
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Over 12 years across Big Four audit, Investment Banking, and corporate advisory. Kish works with SaaS founders, tech companies, and ambitious UK SMEs from £1M to £50M in revenue on fundraising, valuations, exit planning, and financial strategy. ICAEW regulated. Big Four trained. Based in London.