How a Working Capital Peg Alters the Final Deal Price

A sale price on paper is not always the cash a seller takes home. In many acquisitions, especially cash-free, debt-free deals, the number agreed at signing moves after completion.

That is where the working capital peg matters. It is not a side note for accountants. It is one of the main checks that protects both buyer and seller from handing over a business in an unfair state.

What a working capital peg actually is

A working capital peg is the target level of net working capital the business must deliver at completion. Net working capital usually means current assets, such as trade debtors and stock, less current liabilities, such as trade creditors and accrued costs.

If the business arrives at completion with that normal level intact, the agreed price should hold. If it arrives above or below that level, the price often changes.

The simple difference between working capital and cash

Working capital is not the same as cash in the bank. Cash may be stripped out of a cash-free, debt-free deal, but the buyer still expects the business to have enough fuel to trade on day one.

So buyers look at debtors, stock and creditors. A business can show good profit and still arrive short of working capital if receivables are slow, stock is thin, or suppliers have been paid unusually early.

Why buyers and sellers agree on a peg

The peg sets a fair handover point. It says, in simple terms, “this is what normal looks like”.

Without that target, either side can gain from timing. A seller might chase collections hard, run down stock, or delay supplier payments before completion. A buyer could then inherit a business that looks fine on paper but needs extra cash at once.

The headline valuation is only the starting point, not the final cheque.

How the peg changes the final deal price

Most deals compare the peg with the actual working capital delivered on completion, then adjust the price through completion accounts. That process is often called a true-up.

In the current UK market, buyers remain selective and disciplined on price. That makes working capital adjustments more important, not less.

When the final price goes up

If the peg is £500,000 and the business delivers £650,000 of agreed working capital, the seller may receive a £150,000 uplift. The logic is simple. The buyer has received more trading capital than expected.

That extra amount can support growth, cover supplier payments, or reduce the buyer’s need to inject cash after completion.

When the final price goes down

If the same business delivers only £400,000, the buyer will usually claim a £100,000 reduction. That may come off the price at completion or be repaid later, depending on the deal terms.

This is where sellers get caught out. The headline number may look strong, but weak working capital at completion can cut sale proceeds fast.

Why a small gap can still matter

A gap of £75,000 or £100,000 may not sound dramatic in a multi-million pound deal. Yet for an SME owner, that money can shape what happens next.

It may affect tax planning, debt repayment, earn-out pressure, or the capital available for the founder’s next business. Small adjustments often feel large when the money becomes personal.

How the peg is normally set in an acquisition

The peg is usually negotiated, not guessed. Buyers want evidence of what “normal” working capital looks like in the ordinary course of trade.

That is why this figure often gets more debate than owners expect.

Using past accounts to find a normal level

Advisers usually review at least 12 months of monthly data, and often more. They look for a fair average and then strip out one-off items, unusual payments, and timing spikes that would distort the picture.

A good peg should reflect normal trading, not a lucky month or a messy year-end cut-off.

Why seasonality and timing can distort the number

Seasonality can make a simple average misleading. A retailer may carry more stock before Christmas. A project-led business may build up debtors around invoice milestones. A SaaS company may collect annual subscriptions in advance and show a very different working capital shape.

Because of that, the peg should match the expected completion date and the real trading cycle.

What buyers usually want, and what sellers push back on

Buyers often argue for a higher peg because it gives them more comfort after completion. Sellers push for a lower peg because it protects proceeds.

Neither side is always right. The best outcome usually comes from evidence, not pressure. If the numbers are clean and the trading pattern is clear, the negotiation becomes far easier.

The deal terms that can make or break the adjustment

The peg matters, but the legal drafting around it matters almost as much. Two deals can use the same peg and still produce different price outcomes because the definitions differ.

What gets included and excluded from working capital

Not every balance sheet item belongs in the calculation. Cash and debt are often carved out in a cash-free, debt-free deal. Tax balances, intercompany items, director loans, exceptional prepayments and old provisions may also be excluded or treated separately.

If the SPA is vague, disputes start after completion, when positions harden and legal cost rises.

How collars, buffers, and dispute rules protect both sides

Some deals include a small tolerance band. That stops a £10,000 difference becoming a full argument. Clear timelines, review rights and expert determination clauses also help.

These terms keep the process practical. They also reduce the chance that a modest accounting point turns into a costly fight.

Why completion accounts need clean data

Poor bookkeeping makes every peg harder to agree. Weak month-end reporting, stale balance sheet reconciliations and unexplained journals create doubt, and doubt usually hurts the seller.

Buyers trust numbers that tie back to clear records. Sellers should want the same standard before going to market.

How UK SMEs can avoid nasty surprises before signing a deal

Good preparation protects value. It also gives owners more control over the story buyers tell themselves about the business.

Keep debtor days, stock, and payables under control

Late collections, excess stock and erratic supplier payments all affect working capital. Better discipline now can support a stronger peg later.

It also shows the buyer that the business is well run, not dressed up for sale.

Clean up the balance sheet before due diligence starts

Old credits, unreconciled items, doubtful debtors and strange accruals can all distort the peg. Sellers should review them early and fix what can be fixed.

That work is not cosmetic. It can stop an avoidable price chip.

Build a case for a fair peg with real numbers

A seller’s view of “normal” only carries weight if the data supports it. Monthly reporting, historic trends, seasonality analysis and clear explanations all help.

That is where solid finance support matters. A well-prepared case gives the buyer less room to force a cautious assumption.

Conclusion

A working capital peg can change what the seller receives, even when the headline valuation looks settled. In many deals, it is one of the last things that moves the price up or down.

Owners should treat the peg as a core value issue, not an accounting footnote. When it is understood early, defined properly and backed by clean numbers, there is far less room for surprise at completion.