Working Capital Adjustment
Working Capital Adjustment is the purchase-price true-up that compares the net working capital a seller actually delivers at closing against an agreed target, or peg, raising the price dollar-for-dollar when the seller leaves more than the peg and reducing it when the seller leaves less. The working capital adjustment exists so a seller cannot quietly fund part of the purchase price by collecting receivables early, running inventory down, or stretching payables in the months before closing.
Also called net working capital adjustment, working capital true-up, working capital peg, NWC adjustment, net working capital peg · Last updated 2026-08-07 · All 24 terms
How the peg is set
The peg is the amount of net working capital the buyer says the business needs in order to keep operating at its normal level the day after closing, without the buyer having to inject cash.
Net working capital for this purpose is almost always defined on a cash-free, debt-free basis: current assets excluding cash, minus current liabilities excluding funded debt and excluding the current portion of long-term debt. The standard method for setting the peg is a trailing twelve-month average of month-end net working capital, built from the seller's monthly balance sheets over the twelve months ending at the most recent closed month before signing.
Worked example. A distributor's month-end balance sheets over the trailing twelve months average out to accounts receivable of $520,000, inventory of $610,000, and prepaid expenses of $30,000, against accounts payable of $260,000 and accrued liabilities of $50,000. Current assets excluding cash average $1,160,000; current liabilities excluding debt average $310,000. The peg is $850,000.
The true-up mechanics, step by step
The adjustment runs in two passes, because nobody has final numbers on the closing date.
Pass one, at closing. The seller delivers an estimated closing statement a few days before closing showing estimated net working capital. Say it comes in at $820,000 against the $850,000 peg. The $30,000 shortfall reduces the cash paid at closing by $30,000.
Pass two, the true-up. The buyer prepares a final closing statement within an agreed window, typically 60 to 90 days after closing, once receivables have aged and inventory has been physically counted. Say the final statement lands at $790,000, which is $30,000 worse than the estimate because $28,000 of receivables proved uncollectible and a $2,000 accrual was missed. The total shortfall against the peg is $60,000, of which $30,000 was already taken at closing, so a further $30,000 is released to the buyer from escrow or paid directly by the seller.
When the numbers run the other way — final net working capital of $900,000 against an $850,000 peg — the buyer pays the seller the $50,000 excess. Well-drafted agreements make the adjustment symmetric in both directions; a one-way adjustment that can only ever reduce the price is a term sellers' counsel routinely resists.
The dispute path matters as much as the math. Market-standard agreements give the seller a defined objection window, require the buyer to give the seller and its accountants access to the workpapers behind the closing statement, and name an independent accounting firm as sole arbiter of any items still in dispute, with its determination binding and its fee allocated between the parties. The ABA Private Target Mergers and Acquisitions Deal Points Study is the reference practitioners use for how often each of these mechanics actually appears in signed middle-market agreements, and it is a better source for a prevalence claim than any individual dealmaker's recollection.
Defining net working capital in the purchase agreement
The most litigated feature of this adjustment is not the number, it is the definition. The purchase agreement needs a schedule listing, line by line, exactly which balance sheet accounts are in and which are out, and stating that the closing statement will be prepared using the same accounting policies, methods and estimation practices used to calculate the peg.
That consistency clause carries the whole mechanism. If the peg was calculated on a seller's historical practice of reserving nothing against receivables, and the buyer then prepares the closing statement using a GAAP-appropriate allowance for doubtful accounts, the buyer collects a windfall that has nothing to do with what the seller actually delivered. The usual protection is to attach the peg calculation itself to the agreement as an exhibit, so that the closing statement can be compared against a worked example rather than against a paragraph of prose.
Where it goes wrong
Seasonality. A peg struck on a twelve-month average and applied to a business closing at its seasonal peak shows an enormous apparent excess; the same peg applied at the trough shows a shortfall. In both cases the adjustment is measuring the calendar rather than the seller's behavior. Seasonal businesses use a peg curve keyed to the closing month, or a peg set on the same calendar month in prior years.
Deferred revenue. Customer deposits and prepaid service contracts are current liabilities the buyer must perform against, but the cash arrived before closing. Whether deferred revenue is a working capital item, an indebtedness item, or a separate dollar-for-dollar price reduction has to be decided explicitly; leaving it ambiguous reliably produces a post-closing fight.
Double-counting. An item swept into the definition of indebtedness and also captured as a current liability inside net working capital reduces the price twice. The indebtedness schedule and the net working capital schedule have to be cross-checked line by line against each other.
Growth. A business growing 25 percent year over year needs more working capital at closing than its trailing average carried, so a trailing twelve-month peg systematically favors the seller in a growing business. Buyers of fast-growing companies commonly propose a peg built on the most recent three or six months instead, and that is a legitimate ask rather than a negotiating trick.
Cut-off and stale accruals. Payroll accrued but unpaid, sales tax collected but not remitted, and unbilled work in progress are the accounts most often missing from a seller's monthly balance sheets, and every one of them moves the final number against the seller.
When there is no working capital adjustment at all
Most Main Street asset sales do not have one, and importing lower-middle-market mechanics into a $900,000 deal is a reliable way to break it. The prevailing convention on a small asset sale is simpler: the seller keeps cash and accounts receivable and pays off accounts payable at closing, the buyer receives the operating assets free of liabilities, and saleable inventory is counted at closing and paid for at cost on top of the price. There is no peg, no closing statement and no true-up. That convention varies by region and by broker, which is itself the reason it belongs in writing.
Deal structure drives whether the question arises at all. In an asset sale the parties choose which accounts come across, so a peg is optional. In a stock or equity sale the buyer acquires the entity with every asset and liability already inside it, so a peg and a true-up are close to universal. Either way the decision belongs in the letter of intent. A letter of intent silent on working capital hands the drafting pen to the buyer's counsel, and a first draft sets the peg where the buyer wants it.