deal-structures
A working capital adjustment changes the equity price so the buyer receives a “normal” level of trade working capital at closing. Above the peg, the seller is paid more; below, the price falls.
A company needs receivables, inventory and payables to operate. If the seller strips cash and lets payables balloon just before closing, the buyer inherits a business that immediately needs a cash injection. The working capital adjustment, usually inside completion accounts, is designed to stop that.
The peg is typically a normalised average — twelve month-ends is common — not a single year-end that may be a seasonal trough. Financial due diligence builds that average and argues about what sits in WC versus net debt.
Items that wander between WC and debt-like: accrued bonuses, customer deposits, factoring, overdue capex payables, tax balances, deferred revenue. There is no universal truth. There is only the schedule both sides sign.
Locked box deals generally skip a WC true-up; the buyer underwrites ordinary-course WC movement after the box date.
Monthly NWC averages €3.4m. Peg set at €3.4m. Closing NWC €3.05m. Price down €0.35m. Separately, an overdue VAT balance of €0.20m is treated as debt, not WC, so it does not also hit the peg. Double-counting is the classic fight.
Buyers want a high peg and a wide WC definition. Sellers want a low peg and cash-like items kept out. Seasonal businesses (retail, agriculture, some industrials) live or die on the reference period.
A peg from a COVID year. Including cash in WC and also in net cash. No collar, so every euro is fought. Using a U.S. “cash-free/debt-free with WC peg” on a deal that was marketed as locked box.
A peg will not fix a structurally under-working-capitalised model (negative WC as a way of life versus a one-off squeeze). It also will not measure quality of receivables — that is quality of earnings.
The peg should be a visible time series, not a number in a footnote. When monthly WC is a structured object, the adjustment conversation is short.