Last updated: 2026-06-18

What Is Working Capital?

Working capital is the cash and short-term assets a business needs to fund its day-to-day operations. In a business sale, working capital is the most negotiated number after the headline purchase price. The amount the seller delivers to the buyer at close, called the “working capital peg,” directly affects how much money actually hits the seller’s bank account on day one.

The Definition

Working capital equals current assets minus current liabilities. Current assets include accounts receivable, inventory, and prepaid expenses. Current liabilities include accounts payable, accrued expenses, and any short-term debt. In M&A, working capital usually excludes cash (because most deals are cash-free, debt-free) and excludes long-term items.

Why Buyers Care

Buyers don’t want to inherit a business that’s been stripped of operating cash. If a typical month requires $300K of working capital to keep payroll running, vendors paid, and customer credit terms honored, the buyer needs that $300K still in the business at close. Otherwise, they have to inject capital on day one just to keep the lights on.

The Working Capital Peg

The “peg” is the agreed minimum working capital the seller delivers at close. Two methods dominate:

• Trailing twelve months average. Calculate the monthly working capital balance for each of the last 12 months. Average them. That’s the peg.
• Normalized peg. Adjust the TTM average for seasonality, one-time spikes, or known anomalies. Used when seasonality is heavy (HVAC, landscaping, snow removal).

If your business closes with working capital above the peg, the buyer pays you the excess. If below, you pay the buyer the shortfall. This adjustment happens 60 to 120 days after close, once the closing balance sheet is finalized.

What Founders Get Wrong

Most founders assume the headline purchase price is what they take home. It isn’t. If your peg is $400K and your closing balance shows $250K of working capital, you owe the buyer $150K at adjustment. That money comes off your proceeds.

The fix: track your working capital monthly starting 18 to 24 months before a sale. Smooth seasonality where you can. Time vendor payments and customer collections so you’re not closing at a low point in the cycle.

Working Capital vs. Cash

Cash is almost always excluded from working capital in M&A. A cash-free, debt-free deal means the seller keeps the cash balance at close and pays off the long-term debt. Working capital is the operating fuel left in the business: receivables, inventory, payables.

Where This Hurts the Most

Businesses with long collection cycles or heavy inventory get hit hardest. A B2B service business with 60-day net terms can have $500K+ of working capital tied up. A distribution business holding seasonal inventory can have $1M+. In both cases, the working capital peg becomes a major line item in the deal structure.

How CT Acquisitions Handles This

Every deal we run includes a working capital analysis before the LOI is signed. We model the peg using your last 24 months of monthly balance sheets, identify any seasonality or one-time adjustments, and structure the deal so the peg doesn’t become a surprise at close. Sellers who don’t do this often lose 5 to 15 percent of their proceeds to working capital adjustments they didn’t see coming.

Every deal we run includes a working capital analysis before the LOI is signed. We model the peg using your last 24 months of monthly balance sheets, identify any seasonality or one-time adjustments, and structure the deal so the peg doesn’t become a surprise at close. Sellers who don’t do this often lose 5 to 15 percent of their proceeds to working capital adjustments they didn’t see coming.

Related Question

Can I negotiate the working capital peg?

Yes. The peg is negotiated as part of the LOI and definitive agreement. Sellers with strong financial controls and clean trailing data have leverage to argue for a lower peg (smaller delivery requirement) or a different methodology (e.g., normalized average vs. simple TTM). Sellers with messy financials usually accept the buyer’s peg without much argument because they can’t make a defensible case for a lower number.

Want to Know Your Specific Number?

Every business is different. A short conversation gives you a real answer based on your specific numbers. Book a Free Consultation Try Our Valuation Tool.

Every business is different. A short conversation gives you a real answer based on your specific numbers.

Book a Free Consultation Try Our Valuation Tool