A working capital adjustment is the mechanism in a transaction that ensures the buyer receives a business with a normal, agreed level of working capital at closing, with the purchase price adjusted upward or downward based on what is actually delivered.
The working capital peg is the target level of working capital that the purchase price assumed. If the business delivers more working capital than the peg at closing, the buyer pays more. If it delivers less, because receivables were drawn down, payables delayed, or inventory reduced ahead of closing, the buyer pays less. The adjustment reconciles the theoretical deal with the actual financial position delivered.
Establishing the peg requires agreeing on the definition of working capital, which current assets and liabilities are included and how each is measured, and on the accounting policies used to calculate it. These definitions need to be precise and agreed before signing, because disputes over working capital adjustments are among the most common sources of post-closing conflict in private transactions. A target that is ambiguously defined produces a dispute. One that is precisely specified and consistently applied produces a clean adjustment that both parties accept.
See also: Closing and Post-Closing Adjustments · Enterprise Value · Purchase and Sale Agreement (PSA)Working capital adjustments can move the effective purchase price materially. The peg needs to be understood and agreed with precision. See how Wefinx approaches exit planning.