How is a working capital peg calculated?

Usually as the average of the business's month-end trade working capital over a recent period, often twelve months, after removing one-off items and restating each month to the accounting policies the completion accounts will use. Where trading is seasonal and completion will fall in a known month, the parties may agree a peg for that month instead. The calculation is a negotiation as much as an arithmetic exercise, and the due diligence report is usually where it starts.

What happens if working capital at completion is above the peg?

Under a completion accounts mechanism, the price usually rises by the excess, because the seller has left more money in the business than the price assumed. Some agreements adjust only one way, cap the adjustment, or set a band within which no adjustment is made. Which applies is a term of the sale agreement, so a reader of the deal checks the clause rather than assuming the adjustment is symmetrical.

What is the difference between completion accounts and a locked box?

Both settle how the price responds to the balance sheet, but at different dates. A completion accounts deal agrees an estimated price at signing, then draws up a balance sheet at completion and adjusts the price for the difference from the peg and the agreed net debt. A locked-box deal fixes the price from a balance sheet struck before signing and makes no adjustment afterwards; the buyer relies instead on the seller's promise that no value leaves the business between that date and completion.

Why does seasonality matter for the working capital peg?

Because a seasonal business holds very different balances at different times of year. A peg based on a twelve-month average sits above the seasonal low and below the peak, so a completion in the quiet month looks like a shortfall and one in the busy month like an excess, with nothing abnormal in either. That is why parties argue over whether to peg to the average or to the month of completion.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Normalised Working Capital: a Worked Example

The price assumes a normal month. Completion may not fall in one.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-07

// THE SHORT ANSWER

A buyer pays for a business that can trade the day after completion, and that takes money tied up in stock and unpaid invoices. Normalised working capital is the parties' estimate of how much: the level of receivables and stock, net of supplier credit, that the business ordinarily carries. Written into a sale agreement as the peg, it makes the price rise or fall with the working capital actually handed over. A lender financing the buyer reads it for another reason: any shortfall at completion is money the business will need, usually from its bank, within months.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

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// 01 — WHY THE LEVEL OF WORKING CAPITAL HAS A PRICE

Businesses are commonly sold on a cash-free, debt-free basis: the buyer agrees a value for the whole enterprise, and the seller's net debt at completion is deducted to reach the price of the shares. Working capital sits between the two. A seller who collected every receivable early and paid suppliers late in the final month would turn working capital into cash, which reduces net debt and so raises the price, while the buyer inherits a business that must rebuild those balances from its own funds.

The peg stops that. The price assumes a normal level of working capital is delivered, and the completion accounts true it up. A lender has its own use for the figure. Financing the acquisition, it counts any rebuild as a cash need in the first months. Sizing a working capital facility, it starts from the normal level and the seasonal peak, not from one month-end.

// 02 — HOW THE NORMAL LEVEL IS SET

Trade working capital = trade receivables + stock − trade payables

Normal level = average of month-end balances, often twelve

less one-off items, on the completion accounts' policies

Price adjustment = working capital at completion − peg

In a seasonal business the largest choice is the period. Averaging twelve month-ends smooths the seasons out, but a completion that falls in a known high or low month may be pegged to that month instead, and the gap between the two readings can be large, as the example shows. Normalisation comes next: a one-off stock build, a bad debt written off in a single month or a balance distorted by a dispute is taken out, and every month is restated to the accounting policies the completion accounts will use. The definition matters too. Trade items are in, often with accruals and prepayments; cash, borrowings and items the buyer treats as debt, such as tax owed or suppliers stretched far beyond terms, are out. A business growing fast may argue for a peg that reflects its size at completion rather than its average. In a locked-box sale none of this applies at completion: the price is fixed from an earlier balance sheet and value is protected by restrictions on leakage. Both mechanisms are used in New Zealand, Australia and the UK.

// 03 — THE EXAMPLE

A timber merchant, constructed for this page like every figure in it, is sold with completion on 30 June. Its month-end balances of trade working capital for the previous financial year, July to June, total US$75.6m, peaking at US$7.2m in November and falling to US$5.6m at the June year-end. October and November each include a US$0.6m stock build for a single project that will not recur.

Twelve month-ends 75.6

Less one-off project stock (2 × 0.6) −1.2

Normalised total 74.4

Peg: 74.4 ÷ 12 6.2

Enterprise value agreed 30.0

Less net debt at completion −8.0

Adjustment: 4.9 at completion − 6.2 −1.3

Price paid for the shares 20.7

The seller handed over US$4.9m after a hard final month of collections. Against the annual peg, the price falls by US$1.3m. The seller's reply is that June is the merchant's quietest month and should be measured against last June: on that view the shortfall is US$0.7m (5.6 − 4.9). The US$0.6m between the two readings is the value of one sentence in the sale agreement.

Working capital at completion (June) 4.9

Normalised November peak (7.2 − 0.6) 6.6

Cash the business must find by November 1.7

The buyer's lender reads a third number. Whatever the price adjustment, the business will need US$1.7m more in receivables and stock within five months of completion, and that has to be funded by a facility in place on day one. The levels are the example's, not a market norm.

// 04 — HOW IT DIFFERS FROM THE BALANCE ON THE DAY

Reported working capital is a balance at one date. Normalised working capital is a level the business needs over time, and the two can differ widely in a seasonal business or one managing its month-ends. A lender looking at a borrower's annual accounts is seeing the balance on the day; the peg is closer to what a lender wants to know, which is what the business needs on an ordinary day.

In a lending file the same level appears under another name. The part of an overdraft that does not clear through the year, the hardcore, usually exists because it is funding the permanent level of working capital. Reading normalised working capital tells a lender how much of a working capital line is really long-term money, which is the question behind temporary or permanent working capital.

DEFINED IN ONE PARAGRAPH → · TEMPORARY OR PERMANENT → · THE EARN-OUT →

// 05 — WHERE IT DECIDES A FILE

In an acquisition, the lender reads the peg beside its own view of the month-end history and the buyer's due diligence report. A peg set low, or a completion in the seasonal trough, means the business will need cash soon after the deal, and the facility has to carry it. A lender who sizes the acquisition debt without that rebuild has lent against a business that cannot trade at its normal level without borrowing more.

The same reading applies outside a sale. A borrower refinancing in a quiet month, or one that has stretched its suppliers before the new lender's review, presents lower working capital and lower debt than the business normally carries. The lender expects the business to rebuild that gap with borrowed money before long, and asks for the monthly balances that show where the normal level sits.

ASSESSING A WORKING CAPITAL REQUEST → · THE CASH CONVERSION CYCLE →

// QUESTIONS PEOPLE ASK

How is a working capital peg calculated?: Usually as the average of the business's month-end trade working capital over a recent period, often twelve months, after removing one-off items and restating each month to the accounting policies the completion accounts will use. Where trading is seasonal and completion will fall in a known month, the parties may agree a peg for that month instead. The calculation is a negotiation as much as an arithmetic exercise, and the due diligence report is usually where it starts.
What happens if working capital at completion is above the peg?: Under a completion accounts mechanism, the price usually rises by the excess, because the seller has left more money in the business than the price assumed. Some agreements adjust only one way, cap the adjustment, or set a band within which no adjustment is made. Which applies is a term of the sale agreement, so a reader of the deal checks the clause rather than assuming the adjustment is symmetrical.
What is the difference between completion accounts and a locked box?: Both settle how the price responds to the balance sheet, but at different dates. A completion accounts deal agrees an estimated price at signing, then draws up a balance sheet at completion and adjusts the price for the difference from the peg and the agreed net debt. A locked-box deal fixes the price from a balance sheet struck before signing and makes no adjustment afterwards; the buyer relies instead on the seller's promise that no value leaves the business between that date and completion.
Why does seasonality matter for the working capital peg?: Because a seasonal business holds very different balances at different times of year. A peg based on a twelve-month average sits above the seasonal low and below the peak, so a completion in the quiet month looks like a shortfall and one in the busy month like an excess, with nothing abnormal in either. That is why parties argue over whether to peg to the average or to the month of completion.

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THE GLOSSARYIN ONE PARAGRAPHNormalised working capital (working capital peg) What is normalised working capital, and why does it move an acquisition price?