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Today's SMB Manual looks at the working capital peg, how a shortfall cuts the price after closing, and what to settle early.
— THE LEAD
The Working Capital Peg
A buyer offers $10 million for your electrical contracting company. The business earns $2 million in EBITDA (earnings before interest, taxes, depreciation, and amortization). The deal assumes the company has no debt and enough working capital to operate normally. You sign the letter of intent without agreeing on the buyer's expected working capital level.
Working capital is current assets minus current liabilities. In a business sale, the calculation usually includes receivables, inventory, and unpaid bills, while excluding cash and debt. For contractors, it may also include amounts owed on unfinished projects and customer deposits.
During due diligence, the buyer proposes a $1.6 million working capital peg. The peg is the amount the purchase price assumes will remain in the business. The buyer calculates it using the average of the previous 12 months. You expected $1.2 million, the amount on your December balance sheet after the slow season. Under the buyer's proposed formula, the $400,000 shortfall reduces the price dollar for dollar. Assuming no other adjustments, you receive $9.6 million.
Purchase price adjustments are common in private business acquisitions. SRS Acquiom studied more than 1,570 acquisitions completed between 2020 and September 2025, most of which were considerably larger than this example. It found that 91% of deals completed in the first nine months of 2025 included a purchase price adjustment provision, compared with roughly half a decade earlier. After closing, the buyer typically prepares a statement calculating the final working capital. The final adjustment favored the buyer in 51% of deals and the seller in 38%.
Most adjustments were small. The median final buyer-favorable adjustment was 0.27% of the transaction value. But 19.6% of those adjustments reached at least 1% of the deal value. Three-quarters of deals included a separate escrow, money held back at closing to cover potential adjustments.
The issue often starts when the seller agrees on a price without defining how much working capital must remain in the business. If the peg is left open, the parties negotiate it during due diligence. By then, the seller may have agreed to stop discussing a sale with other buyers.
The purchase agreement's wording also matters. In August 2023, Versar acquired Louis Berger Services from WSP USA. The agreement defined working capital as current assets minus current liabilities. Versar later sought a $9.7 million price reduction, including $5.3 million for allegedly unfulfilled Florida Department of Transportation contracts, which it classified as a current liability.
Accounting methods can also affect working capital. In a January 2026 Delaware case, sellers alleged that a controller hired after closing switched the company from cash to accrual accounting. Cash accounting records revenue when received, while accrual accounting records it when earned.
Include a proposed working capital peg in the letter of intent, along with the calculation method. A 12-month average may work for some businesses, while a seasonal contractor may need a calculation that accounts for fluctuations in project activity. Attach a sample calculation to the purchase agreement.
Specify which dispute process applies when a claim involves both working capital and a broken promise about the business. Consider a small threshold below which no adjustment is required, and review the buyer's closing statement carefully. In this example, agreeing to a $1.2 million peg would have prevented the $400,000 reduction, assuming the same closing calculation and the buyer's acceptance. Negotiate the peg alongside the purchase price, before signing the letter of intent.
— WHAT WE’RE READING
Main Street America surveyed 1,568 small business owners about profitability and business decisions. Among owners who purchased their business property in the past year, 33% reported rising profits, compared with 18% reporting declines. Businesses using merchant cash advances faced greater difficulties: 56% reported falling profits, compared with 39% overall. Among owners who made no operational changes, 47% reported declines. Read →
The Bureau of Labor Statistics reported median weekly earnings of $1,232 for full-time workers in the third quarter, up 1.5% from a year earlier. Consumer prices rose 3.5% over the same period, meaning wages failed to keep pace with inflation. Service workers had the lowest median earnings, at $876 for men and $760 for women. For small business owners, the figures raise questions about employee retention, wage increases, and how much additional payroll expense their businesses can absorb without raising prices. Read →
