What is a Working Capital PEG?

Working Capital PEG

Dictionary Definition

A benchmark or baseline amount of net working capital that is agreed upon by the buyer and the seller and is usually determined toward the end of financial due diligence.

Plain English

The Working Capital PEG negotiated between the buyer and the seller. It is the WC amount that will be left in the business as of the date of closing.

What is negotiated?  The basic formula of assets - liabilities = WC is hardly ever the calculation used when negotiated with a buyer.  When negotiating, the seller usually wants the WC to be as low as possible, leaving more money in their pocket at closing.  Conversely, the buyer wants as much left in the business and negotiates for a higher WC.  The individual items on the asset and liabilities side are negotiated to be left in the formula or removed.   

Why it Matters to You

Once the WC PEG is set, there is a dollar for dollar adjustment at the time of closing for any difference. If the actual WC is above the PEG on the day of closing, the seller will receive a "refund." If the actual WC is below the PEG, the seller will have to "pay in."