The purchase price can change after closing
A working-capital mechanism is designed to deliver a normally funded business.
Most acquisitions assume the seller will deliver the business with a normal level of working capital. The purchase agreement compares actual working capital at closing with an agreed target, often called the peg. The difference generally adjusts the purchase price.
The concept is simple; the definition is where negotiations occur.
Which current assets and liabilities are included? How are aged receivables, inventory reserves, deferred revenue, customer deposits, accrued bonuses, sales taxes, and other items treated? Which accounting policies apply? Are calculations consistent with historical practice? Which items are excluded because they are cash, debt, debt-like obligations, or transaction expenses?
The target is often based on normalized historical working capital, adjusted for seasonality, growth, unusual events, and changes in business mix. A twelve-month average may be sensible for one company and misleading for another.
The seller typically delivers an estimated closing statement, followed by a post-closing calculation and a period for review and dispute. The agreement should define access to records, calculation principles, deadlines, and a mechanism for resolving disagreements.
Owners should model working capital before signing the letter of intent (LOI). Otherwise a later debate about the peg or definitions can feel like a price reduction even when the buyer views it as implementation of the original economics.
Accounting, legal, and transaction advisers should coordinate the analysis because drafting and financial methodology must match.