What is a Working Capital Peg?
A working capital peg is the level of net working capital a buyer and seller agree the business will deliver at closing. Net working capital here usually means inventory, receivables and prepaid costs, minus payables and accrued costs, with cash and debt left out because they are settled separately. If the business closes with more than the peg, the price rises by the difference; if it closes with less, the price falls.
The peg exists so the buyer gets a business that can keep operating the day after closing. Without one, a seller could pull cash out by running stock down or stretching suppliers and leave the buyer to refill the shelves.
How a Working Capital Peg Works for an Ecommerce Brand
For a product brand, inventory is usually the largest piece, so the peg is mostly a statement about how much stock is normal. Seasonality makes that hard. A brand closing in October, in the middle of its holiday build, holds far more inventory than its yearly average, and a peg set on that average gives the seller a price increase for stock the buyer would have needed anyway. A brand closing in February holds less than the average and takes a reduction. Buyers and sellers argue over which months set the peg for exactly this reason.
How inventory is counted and valued matters as much as the peg. A physical count at closing, the costing method, and whether slow or aged units are excluded can each move the delivered figure by more than the gap the peg was meant to catch. Factory deposits paid and stock on the water usually count toward what the seller delivers when the agreement's definition includes them; if it leaves them out, the buyer gets them without paying for them.
What an Acquirer Looks At
An acquirer sets its proposed peg from the quality of earnings review and the monthly balance sheets, and checks whether the brand's working capital has been unusually low or high in the months before the sale. It looks for stock run down ahead of closing, supplier bills paid late, and receivables from wholesale accounts that may not be collected. Monthly balance sheets closed on an accrual basis make the peg far easier to calculate and defend.
Further Reading
How to Prepare and Sell Your Ecommerce Business
Formula
Net Working Capital at Closing = Inventory + Receivables + Prepaid Costs − Payables − Accrued Costs
Price Adjustment = Net Working Capital at Closing − Working Capital Peg
Example
A brand agrees a $10M price with a peg of $1.2M, the average of its last twelve monthly balance sheets. At closing it delivers, with no factory deposits, stock in transit or accrued costs outstanding:
- Inventory: $1,100,000
- Receivables from wholesale accounts: $250,000
- Payables to suppliers: $350,000
- Net working capital: $1,100,000 + $250,000 − $350,000 = $1,000,000
Price adjustment: $1,000,000 − $1,200,000 = −$200,000, so the final price is $9.8M. Had the brand closed mid-build with $1.6M of net working capital, the adjustment would be +$400,000 and the price $10.4M.
General education only, not legal, tax or investment advice; how a term applies to your brand depends on your own documents and advisers.