Two buyers agree to buy the same business at the same price. One of them ends up paying two hundred thousand dollars more at close than the other, and it has nothing to do with who negotiated harder. It comes down to one line in the purchase agreement that first-time buyers barely read: the working capital peg.
If you are buying a business of any real size, this is one of the most expensive things you do not yet understand. Here is what it is and how to keep it from costing you.
Most acquisitions are done on a cash-free, debt-free basis. The seller keeps the cash in the bank and pays off the debt, and you buy the business itself. But the business cannot run on nothing the day after you own it. It needs a normal amount of working capital inside it: the money tied up in receivables customers have not paid yet, the inventory on the shelf, minus the bills the business owes suppliers.
That normal level has to come with the business, or you would have to inject cash on day one just to keep the lights on. So the deal sets a target level of working capital that the seller must deliver at close. That target is the peg.
The peg works as a dollar-for-dollar adjustment to the price. Deliver more working capital than the target, and you pay the seller the difference. Deliver less, and the price comes down. It sounds fair, and it is, as long as the target is set honestly.
The problem is that the target is negotiated, and small changes in it move large amounts of money. Set the peg too high and you are quietly funding the seller's working capital on top of the purchase price. Get the definition wrong and a seller can legally drain value right before close: collecting receivables early, stretching payables, letting inventory run down, so the business shows up light and you are left to refill it out of your own pocket after the deal is done.
Three mistakes show up again and again. The first is ignoring the peg entirely until the closing table, when it is too late to negotiate. The second is letting the target get set off a single recent month, when the business is seasonal and that month was a high or a low. The third is accepting a loose definition of what counts as working capital, which leaves room for exactly the kind of pre-close draining described above.
None of these show up in the multiple everyone fixates on. The headline price gets all the attention. The working capital peg gets the money.
Set the target off a full cycle, not a snapshot. Use a trailing twelve-month average so seasonality cannot be gamed, and adjust for any real growth in the business. Define working capital precisely in the agreement, item by item, so there is no ambiguity about what is included. Build the peg with an accountant or a quality of earnings provider rather than eyeballing it. And insist on a true-up after close, where the actual delivered working capital is measured and the price is corrected, so a light delivery gets caught and refunded.
The working capital peg is not glamorous, and it is exactly the kind of thing that is boring right up until it costs you a six-figure sum. Read it before you sign, and have someone who has seen it before read it with you.
