Working Capital PEG Calculator

The Mechanics of Net Working Capital in M&A

During a business sale, transactions are usually structured on a **cash-free, debt-free** basis, with a requirement that the seller delivers a **normal level of working capital**. This ensures the buyer inherits a company capable of operating from day one without requiring immediate equity injections to fund inventory or pay suppliers.

To establish this baseline, advisors calculate the **Net Working Capital (NWC)** average over a historical 12-month period, establishing the **PEG Target**.

Closing Day Price Adjustments

On the transaction closing date, actual balance sheet accounts are audited.

• Working Capital Surplus: If actual NWC is higher than the PEG target, the buyer pays a dollar-for-dollar valuation premium to the seller.
• Working Capital Deficit: If actual NWC falls short of the PEG target, the buyer reduces the purchase price by the gap size.

Seasonality plays a major role: businesses selling during their high-season peak typically deliver a large surplus, while those selling during low-seasons might deliver deficits. Understanding this flow prevents post-closing disputes.