A cleaning company owner in the Midwest signed an LOI for $1.2M.
He read the price on page one, felt good about it, and moved on to the rest of the document.
Buried on page four was a working capital peg: $90,000, based on a trailing 12-month average of his receivables, payables, and inventory.
He didn’t ask what it meant. Neither did most sellers in his position.
Ninety days later, at closing, his actual net working capital came in at $58,000.
That $32,000 shortfall came straight out of his purchase price. Dollar for dollar.
He didn’t lose the deal. He lost $32,000 he thought was already his.
What a Working Capital Peg Actually Is
The peg is the amount of net working capital — current assets minus current liabilities, cash and debt excluded — the buyer expects to find in the business on day one.
It’s not a random number. It’s usually built from a trailing average of your own historical balance sheet, often 6 to 12 months, sometimes normalized for seasonality.
The logic is simple: the buyer is paying for a business that can operate the day they take over, not a shell they have to refill with cash.
If actual working capital at closing comes in above the peg, the seller gets paid more. If it comes in below the peg, the seller gets paid less.
It’s a two-way mechanism. Most sellers only hear about the downside because that’s the version that shows up in their inbox.
Where Sellers Get Surprised
Here’s where it gets dangerous.
Sellers, understandably, want to walk away from closing with as much cash as possible. So in the weeks before closing, some do exactly the wrong thing: they stop reordering inventory, they push hard to collect every outstanding invoice, they let payables sit a little longer than usual.
It feels like protecting the payout. It’s actually shrinking it.
Every one of those moves lowers net working capital at the closing date — and the peg doesn’t care why the number moved. Low is low. The shortfall gets deducted from the purchase price, usually settled against an escrow holdback in the 30 to 90 days after closing, per the true-up mechanism most purchase agreements spell out.
The cleaning company owner wasn’t trying to game the deal. He just ran the business the way he thought made sense heading into a sale — lean and cash-conscious.
That instinct cost him $32,000.
How the True-Up Actually Works
The peg gets set once, usually during the LOI stage, based on historical averages.
The actual number gets calculated once, at closing, based on the real balance sheet that day.
The gap between the two — in either direction — adjusts what the seller actually walks away with, dollar for dollar, as most standard purchase agreement mechanics for net working capital lay out.
That means two things sellers need to internalize.
First, the peg is negotiable. It’s set based on your numbers, and your numbers can be discussed — trailing 6 months vs. 12, normalized for a slow season or a one-time spike, whatever fairly represents how the business actually runs.
Second, and more important: run the business normally through closing.
Don’t strip inventory. Don’t rush collections in a way that isn’t typical for your business. Don’t let payables slide past their normal terms. The peg was built off your normal operating pattern — deviating from it right before closing doesn’t protect your payout, it usually costs you.
Negotiate the Mechanism, Not Just the Number
Most sellers spend their negotiating energy on the purchase price and none of it on the working capital mechanism. That’s backwards.
Before you sign the LOI, ask how the peg was calculated and over what period. A trailing 12-month average will land differently than a trailing 6-month average if your business has a seasonal swing — a landscaping company heading into fall, a cleaning company that picks up contracts every January. Push for a period that actually reflects a normal operating cycle, not whichever window happens to favor the buyer.
Also ask who calculates the actual number at closing, and what happens if you disagree with it. Most purchase agreements give the seller a review period and a right to dispute, often with an independent accountant breaking the tie if the two sides can’t agree. That clause is worth reading closely — it’s the difference between a fair process and one where the buyer’s accountant has the only pen.
The Takeaway
The purchase price on page one of your LOI is not the number you’ll actually receive.
The working capital peg on page four is what determines how close you get to it.
Sellers who understand the mechanism going in — and keep operating the business the way they always have, right up through closing — tend to land close to their number.
Sellers who don’t find out about it the hard way, at the closing table, when it’s too late to negotiate.
If you’re a few months out from listing, this is exactly the kind of detail worth getting in front of early, not discovering in an LOI you’re under pressure to sign.
Curious what your business is worth — and what a realistic working capital target would look like for your numbers? Let’s talk.