Working capital pegs: prepare the monthly records before negotiating

A working capital peg is a negotiated target used in a transaction's price adjustment mechanism. Preparing for that negotiation means more than calculating current assets minus current liabilities from the latest balance sheet. The parties need a defined set of accounts, an accounting method, and a view of the working capital required for the business being transferred.

RSM's purchase-agreement guidance recommends an illustrative exhibit mapping trial balance accounts to included and excluded items. PwC also emphasizes the accounting basis and historical records behind closing adjustments. These are transaction-specific decisions. Cash, debt, taxes, customer deposits, and other balances should be classified under the actual agreement rather than an assumed universal formula.

Request the historical period the deal team needs, with month-end trial balances and supporting receivables, inventory, payables, and accrual schedules. Apply the proposed account mapping to each month. Do not compare a thoroughly adjusted closing month with historical months that use a different cutoff policy or omit known liabilities.

Preserve any bridge between issued accounts and the history used for negotiation. If the business added a location, changed billing terms, acquired stock, or lost a major customer, mark the date and effect. Those changes can make an unexamined historical average a poor description of the transferred business. The team should be able to distinguish ordinary operating movement from a changed business perimeter.

Check calendar effects in the selected snapshots. A month-end falling before a normal payroll or supplier payment run can leave a different accrual or payable balance from a month-end immediately afterward. Document the underlying timing so a normal payment cycle is not mistaken for a lasting change in working capital needs.

Plot the monthly components separately. Inventory may peak before a selling season, receivables may rise afterward, and payables may finance only part of that cycle. A single net number can hide those movements. Compare balances with the corresponding sales, purchases, and terms so the parties can discuss why a particular month is representative or unusual.

Consider a business that switches a major customer from payment in advance to payment after delivery. Its future receivables requirement may differ from the historical pattern even if annual sales remain unchanged. Keep that commercial change in a supported scenario instead of silently adjusting the entire historical period. The negotiation then has a visible assumption to accept, reject, or refine.

For every balance-sheet account, record its proposed category, inclusion status, relevant accounting policy, supporting schedule, and reviewer. Split an account when it contains several types of balance. For example, ordinary vendor accruals and transaction-specific professional fees should not be forced into one treatment merely because the ledger stores them together.

The table below shows a hypothetical $1.2 million target calculation. It is an arithmetic example using assumed agreed inclusions. It does not establish what a particular deal should include, the appropriate reserve policy, or the target a buyer should accept.

Assume the agreement adjusts price dollar for dollar by closing working capital minus the target. If the agreed target is $1.2 million and closing working capital is $1.05 million under the same definition, the adjustment is negative $150,000. If the contract has different mechanics, caps, exclusions, or dispute provisions, use those instead.

Have the deal team work through disputed items before signing where possible. Test an invoice received after closing for goods received before closing, a customer credit issued after closing, and an obsolete inventory item. Specify which evidence and accounting policies govern. An example exhibit can expose disagreements that remain hidden in a sentence such as normal working capital.

Preserve the closing-date exports, physical inventory evidence where relevant, significant contracts, receipts, invoices, and the calculation version delivered to the counterparty. Agree access and retention arrangements with counsel before systems or ownership change. PwC notes that access to historical records can become harder after control transfers; prepare the relevant records while the company can still retrieve them reliably.

Assign one owner to keep the working capital schedule, debt-like item schedule, and transaction expense schedule consistent. Each balance should have an explicit treatment across the price calculation so it is neither omitted nor counted twice. Record open judgments and the agreed path for resolving them, then have the appropriate accounting and legal advisers review the final contractual mechanism.