THE BARATELLI INSTITUTE · Mentoring at Scale
FOR M&A SELLERS, BUYERS, AND THEIR ADVISORS

The closing mechanism that costs sellers the most. Get the peg right before you sign.

Most LOIs say "delivered with normalized working capital." That phrase is a $200K-2M negotiation in disguise. The peg is the trailing-12 average WC the seller commits to deliver at close — and any shortfall is dollar-for-dollar off the purchase price. Here is the math, the seasonality adjustment, and the normalizations the seller should insist on.

TTM
Trailing-12 average
$1:$1
Adjustment vs. peg
DSO
Day-count framing
±15%
Typical seasonality swing
YOUR PEG
1
Your business
2
Monthly working capital
3
Normalizations
4
Closing assumptions
5
Recommended peg
STAGE 1 OF 5

Your business

Defaults model a $20M revenue distribution business with 60-day AR, 90-day inventory, and 45-day AP — typical industrial distributor profile.

Drives benchmark working capital intensity. Services businesses run 5-15% of revenue; distribution 15-25%; manufacturing 20-35%; e-com varies wildly.
Used to compute benchmark intensity, day-counts (DSO/DIO/DPO), and to scale seasonality.
$
If the business has a meaningful seasonality (retail Q4 peak, pool services summer peak, tax-prep Q1 peak), the closing-month matters enormously. The peg should reflect TTM average, not closing-month, to avoid the seller getting penalized for closing in a "low" month.
TTM 12-month average is the most common and the seller-friendly default. Trailing-3 favors buyers if the business is shrinking; trailing-6 is the middle ground. If business has grown materially, the peg should reflect current run-rate, not historical (this is a seller negotiation point).
What the WC peg actually does. Buyer pays purchase price assuming "normalized" WC at close. If actual WC is below peg, buyer claws back $1 of price for every $1 of shortfall. If actual WC is above peg, seller gets dollar-for-dollar uplift. Most sellers don't realize: the higher the peg, the more cash the seller has to leave in the business at close. A $500K peg-overstatement = $500K of cash the seller leaves on the table.
STAGE 2 OF 5

Monthly working capital — last 12 months

Working capital = AR + Inventory + Prepaids − AP − Accrued − Deferred Revenue. Cash is EXCLUDED (cash-free deal). Debt is EXCLUDED (debt-free deal). Enter month-end balances for the last 12 months.

Month
AR
Inventory
Prepaid
AP
Accrued
Deferred rev
STAGE 3 OF 5

Normalizations

One-time events distort the average. The seller should insist that non-recurring items be excluded from the peg. Common: a single big customer paying late, a one-time inventory build for a new product launch, a strike year, a pandemic-quarter anomaly.

Single large customer that paid 90+ days late in one period (anomaly). Removing it brings the AR average down to normalized run-rate.
$
Pre-launch inventory build, supplier-required minimum-order spike, etc. Should not pollute the steady-state peg.
$
If a major customer recently moved from net-30 to net-60, current AR is structurally higher than TTM average. The TTM peg is now stale — argue for an adjustment up to current run-rate.
$
If you've negotiated longer payment terms with a major supplier, current AP is structurally higher than TTM average — meaning lower WC need. Buyer will want to capture this.
$
Common exclusions in M&A definitions: customer deposits, deferred revenue (treated as debt-like), tax payables (settled at close), insurance proceeds in transit, intercompany balances. Enter total $ to exclude.
$
Common buyer position: deferred revenue represents future obligation, not WC component. If yes, deferred revenue is removed from WC and treated as debt (reducing equity purchase price). For SaaS and subscription businesses, this is often the most-fought negotiation.
Where the buyer will push back. Buyer wants to maximize the peg (get more WC at close = lower effective price). Seller wants the opposite. Every normalization request needs a documented rationale. Have the deal CPA pull GL detail for any one-time exclusion BEFORE the LOI is signed — once the peg is in the LOI, buyer side will refuse normalizations they didn't agree to upfront.
STAGE 4 OF 5

Closing assumptions

When you close determines what you deliver. Closing in a peak-WC month means leaving more cash in the business. Closing in a trough month means a true-up bill from the buyer post-close.

If closing date is known, model the impact. Most M&A deals close in the month following month-end of WC measurement, with a 60-90 day post-close true-up.
Used to size the peg as % of EV and to compute the dollar-for-dollar adjustment as a % of deal value.
$
Your honest estimate of WC on closing date. Compare to peg to see expected adjustment. If you don\'t know yet, use TTM average as a placeholder.
$
Standard true-up window in middle-market deals. 60-90 days post-close for buyer to deliver final calculation; 30 days for seller dispute. Longer windows favor buyer (more time to find adjustments).
The closing-month trap. If your business has Q4 peak revenue and you close in February, your AR is at trough but the buyer benefits from the future Q4 collections. If the peg uses TTM average (which includes the Q4 high months), and the closing is at trough, you owe the buyer a big WC true-up — even though that\'s exactly what your business looks like in February. The fix: lower the peg to reflect the closing-month reality, or insist on an explicit seasonality adjustment in the SPA.
STAGE 5 OF 5 · YOUR PEG

Recommended working capital peg

—
—
—
Recommended peg (post-normalization)
—

Monthly WC pattern (last 12 months)

Peg metrics

Day-count benchmarks

Recommendations

FOR BUYERS — PAIRS WITH THE BUSINESS BUYER'S GUIDE
Business Buyer's Guide · SBA Financing Tool · Asset vs. Stock Sale · §382 NOL
The WC peg is one of seven post-LOI negotiations the buyer needs to win. The Business Buyer's Guide is the umbrella playbook. SBA Financing tool sizes the cash needed for the WC component. Asset vs. Stock Sale models the deal structure that determines what attaches to the WC. §382 NOL tool covers the tax-attribute side. Run all five together for the buyer's full deal picture. Subscribe to the library →
FOR SELLERS — PAIRS WITH THE LIQUIDITY EVENT PLAYBOOK
Liquidity Event Playbook · Solo M&A Banker
The Liquidity Event Playbook chapter on closing mechanics covers the full set of M&A "true-up" provisions — working capital is one; cash, debt, transaction expenses, and pre-close tax are others. The Solo M&A Banker chapter on negotiating the LOI tells you which to fight on.
LIQUIDITY EVENT PLAYBOOK

The peg is the third-most negotiated number in any M&A deal. Get the full closing-mechanics playbook.

Cash-free debt-free conversions · WC peg-setting · escrow / indemnification · earnout vs. seller note · R&W insurance economics · the post-closing audit fight.

Working capital peg-setting is highly fact-specific and varies materially by industry, deal size, and counterparty sophistication. The model uses standard middle-market conventions but does not capture every variant: roll-forward methodology for closing-month WC, "lock-box" mechanism vs. true-up, foreign-currency translation, intercompany WC for multi-entity targets, or the interplay with R&W insurance carve-outs. The deferred-revenue-as-debt treatment varies by deal — for subscription businesses this is often the largest single negotiation. Engage M&A tax counsel and a deal CPA for any actual transaction.
WANT THE METHODOLOGY BEHIND THIS TOOL?
This calculator is one chapter of The Liquidity Event Playbook.
The tool gives you the answer. The guide gives you the argument — the case law, the worked examples, the negotiation playbook, the cross-check tables, the exception cases. Read the chapter and you can defend your number to a board, a buyer, an examiner, or a counterparty.
The methodology behind this calculator is in Ch 8 Working Capital Peg of the reference guide.
See the Guide → Browse all 22 guides
PROFESSIONAL DISCLAIMER · PLEASE READ

Educational and informational purposes only. This calculator and any output it produces are intended solely for general educational and decision-support purposes. They do not constitute investment, tax, legal, accounting, appraisal, lending, insurance, or any other professional advice, and they do not create a fiduciary, attorney-client, accountant-client, or advisor-client relationship of any kind.

Estimates based on your inputs. All results are estimates derived from the data and assumptions you provide. Tax law, accounting standards, regulations, market conditions, and the specific facts of your situation can materially change the answer. The Baratelli Institute, its affiliates, and any co-branding professional make no warranty of accuracy, completeness, currency, or fitness for any particular purpose, and disclaim all liability for decisions made in reliance on the output.

Consult your own qualified professionals. Before acting on anything calculated here, consult your own attorney, CPA, financial advisor, appraiser, lender, or other qualified professional licensed in your jurisdiction who has reviewed your specific facts and applicable current law. The Baratelli Institute is a publisher of practitioner reference material. It is not a registered investment adviser, broker-dealer, law firm, accounting firm, appraisal firm, or lender.

Co-branded versions: If a professional advisor's name and contact information appear on this tool, that advisor has elected to make the tool available to clients as a courtesy. Inclusion of an advisor's name does not constitute the advisor's endorsement of any specific result, nor does it transfer professional responsibility for the underlying methodology to that advisor. The disclaimer above applies regardless of co-branding.