What is a working capital peg?
It is the amount of working capital a buyer expects to find in the business on the day it closes, agreed in advance and written into the agreement. Deliver less and the price falls dollar for dollar. Deliver more and, in theory, it rises.
The logic is uncontroversial. A buyer is paying an enterprise value for a business that runs on a certain amount of receivables, inventory and payables, and it does not want to buy the same company twice: once at the multiple, and again by funding a working capital hole on the first Monday. So the parties agree a normal level, call it the target or the peg, and true up to it after closing.
The reason this matters more than it sounds is arithmetic. On a business with a $30 million enterprise value and a $6 million peg, a fifteen percent miss against the target is a $900,000 change in cash proceeds. That is not a rounding item. It is a larger swing than most sellers negotiate on the multiple, and it is settled after the leverage in the process has gone.
It is also close to universal. Across the transactions in the most recent published deal terms study, ninety-three percent carried a purchase price adjustment mechanism, and of the deals that had one, eighty-nine percent produced an actual adjustment (SRS Acquiom, M&A escrow and deal terms statistics, published 19 May 2026). Read those two figures together and the conclusion is blunt: the number signed on the letter of intent is a starting position, not a price.
How is the target actually set?
From a trailing average of the company's own monthly balance sheets, usually the last twelve months, sometimes the last three to six where the business is growing quickly or the year contains a distortion. The mechanic is simple. The dispute is never about the mechanic.
It is about two things the buyer drafts. The first is which accounts are inside the definition of working capital and which sit outside it. Cash and debt are almost always excluded, because the deal is priced on a cash-free, debt-free basis and those are handled separately. Everything else is argued: deferred revenue, accrued bonuses, customer deposits, the current portion of capital leases, income taxes payable, prepaid insurance, and any accrual a diligence process has just created.
The second is the accounting policy the target is measured under. A trailing average calculated on the seller's historical policies and a closing balance sheet calculated on the buyer's post-diligence policies are not the same measurement, and the gap between them runs one way. If diligence has proposed a larger bad debt reserve, a slower inventory obsolescence curve or an accrual the company never carried, and the agreement measures the closing balance sheet on those bases while the peg was struck on the old ones, the seller has agreed to a target it can no longer hit.
This is why the useful instruction to a seller is not to negotiate the number. It is to insist that the target and the closing statement be prepared on identical, listed policies, and that the list live in a schedule rather than in a general reference to accounting standards consistently applied. Consistently applied with what is exactly the question in dispute.
Why does almost every deal produce an adjustment?
Because working capital is a balance measured on a single day, and no operating business sits still. A target built on a twelve-month average will differ from the closing balance sheet by ordinary seasonality alone, and the adjustment mechanism exists precisely to capture that. An eighty-nine percent adjustment rate is not evidence of bad faith. It is evidence that the mechanism does what it was written to do.
What matters is the direction and the size. Two features of the current market push both against the seller. The first is that a process is running longer: seventy-three percent of senior investment bank executives expect diligence to become more complex over the next twelve to twenty-four months, and among firms already seeing timelines extend, fifty-seven percent report one to three additional months (SRS Acquiom and Mergermarket, survey of 150 senior US investment bank executives, published 23 February 2026). Every extra month is another month between the peg being struck and the balance sheet being measured, and another month of drift.
The second is that structure is doing more of the work in this market than price. Practitioners describe a rise in deferred purchase price mechanisms hedging seller performance against underwritten value, through earnouts, seller notes and similar structures (Andrew Silver, Much Shelist, quoted by PitchBook News, 6 July 2026). A working capital adjustment is the oldest of those mechanisms and the least negotiated, because it looks administrative.
One caveat on the headline figures. The deal terms study behind them pools transactions closed between 2020 and 2025, published in 2026. It is a six-year population, not a snapshot of the current quarter, and anyone quoting it as this year's data is misreading it. The rates have been stable across that window, which is what makes them usable as a planning assumption rather than a market call.
“Sellers spend three months arguing about a quarter turn on the multiple and eleven minutes on the working capital definition, which is where the same money actually is. By the time the closing statement lands, the process is over, the alternatives are gone, and the only leverage left is a dispute clause somebody else drafted.”
Where does the number move against a seller?
In four places, and none of them is the target itself. The first is the definition, covered above. The second is who prepares the closing statement. Where the buyer prepares it, the buyer sets the opening position and the seller has a fixed window to object, often thirty to forty-five days, with anything not objected to in writing deemed accepted. Where the seller prepares it, the burden runs the other way. This single allocation is worth more than a turn of negotiation on the peg.
The third is the dispute mechanism. A well-drafted clause sends only the disagreed line items to an independent accounting firm, requires that firm to pick a value within the range the two parties have already proposed, and splits its fees in proportion to how the items resolve. A poorly drafted one lets the expert reopen the whole statement, which converts a $200,000 argument into a full re-audit that costs more than the amount in dispute and takes months.
The fourth is timing, and it is the one sellers control best. Working capital in most businesses is seasonal, and a closing date chosen for tax or convenience can sit at the exact point in the cycle where receivables are lowest and payables highest. If the target is a twelve-month average and the closing sits in the trough, the seller funds the difference. That is not gaming. It is arithmetic that nobody modelled.
There is a fifth item worth naming because it is the one that surprises people. Collecting receivables aggressively and stretching payables in the final weeks does not help. It converts working capital into cash, which is excluded from the calculation and swept to the buyer at closing, while the working capital shortfall reduces the price. The seller is paid once and charged once for the same effort.
| Lever | Buyer-favourable version | Seller-favourable version |
|---|---|---|
| Definition and policies | General reference to standards consistently applied, letting post-diligence accruals into the closing statement only | A schedule listing every included and excluded account, with the target and the closing statement on identical stated policies |
| Who prepares the closing statement | Buyer prepares; seller objects within a fixed window, unobjected items deemed accepted | Seller prepares, or buyer prepares with full access to workpapers and an objection window that starts on delivery of them |
| Dispute resolution | Independent expert may review the entire statement, fees split evenly regardless of outcome | Expert decides only disputed items, must choose within the parties' stated range, fees allocated in proportion to the outcome |
| Measurement date | A single closing-date balance, whatever point of the cycle it falls in | A target that reflects the seasonal band, or a collar below which no adjustment is made |
What can a seller actually do about it?
Prepare the number before anyone else does. The concrete standard for this market is at least thirty-six months of clean, normalized monthly financial statements, with a quality of earnings report commissioned early rather than in response to a buyer's findings; firms that closed successfully were described as having well-prepared financial packages that minimized re-trading risk (Capstone Partners, Capital Markets Update, 4 June 2026). Thirty-six months of monthlies is exactly the dataset from which a defensible peg is calculated, which is the second reason to have it.
With that in hand, four things become possible that are not possible without it. A seller can propose the target rather than react to one. A seller can show the seasonal band around the average and argue for a collar or a measurement date rather than a single point. A seller can list the included and excluded accounts in a schedule at the letter of intent stage, when there are still alternative buyers. And a seller can identify, before diligence does, which accruals a buyer is likely to propose, and decide whether to build them into both sides of the calculation or to contest them.
None of this is exotic and none of it requires the business to change. It requires the definition to be settled while competitive tension still exists, which in practice means before exclusivity rather than during documentation. After exclusivity the seller is negotiating with one party who knows there is no other.
The broader point is the one the adjustment rate makes on its own. A mechanism that changes the price in nearly nine deals out of ten is not an administrative annex. It is a term of the deal, and it deserves the attention that the headline multiple gets and rarely shares.
As of August 2026
Sources: SRS Acquiom, M&A escrow and deal terms statistics, published 19 May 2026, for the 93% incidence of purchase price adjustment mechanisms and the 89% rate of actual adjustment among deals carrying one, drawn from a pooled population of transactions closed 2020 to 2025 and published in 2026 rather than a current-quarter snapshot; SRS Acquiom and Mergermarket, M&A due diligence study 2026, published 23 February 2026, surveying 150 senior US investment bank executives, for the 73% expecting greater diligence complexity over the next twelve to twenty-four months and the 57% of already-affected firms reporting one to three additional months; PitchBook News, 6 July 2026, quoting Andrew Silver of Much Shelist, for the observed rise in deferred purchase price mechanisms; Capstone Partners, Capital Markets Update, 4 June 2026, for the thirty-six months of clean normalized monthly financial statements standard, the early quality of earnings guidance and the re-trading observation. The worked $30 million enterprise value and $6 million peg illustration is arithmetic, not a transaction. The four drafting levers and their buyer- and seller-favourable forms are drawn from our own mandate practice. Companion articles on this site cover what a quality of earnings report costs and who pays for it, and why one in three signed letters of intent never closes.