Working capital
The money tied up in running the business day to day: receivables plus inventory, less what you owe suppliers. Not the same as cash in the bank.
In more detail
Working capital is current assets less current liabilities. In a sale it is the cash a business needs simply to keep operating, sitting in customer invoices you have not collected and inventory you have not sold, offset by bills you have not paid. It matters in a transaction because a business handed over with no receivables and every payable due cannot make payroll on day one. So buyers do not treat working capital as something extra they pay for. They expect a normal amount of it to come with the business, and they measure what "normal" is. The way it gets settled: a buyer looks at roughly the last twelve months and asks how much working capital the business needed in the ordinary course. That becomes the target, or peg. At closing the actual figure is compared against it, and because nobody knows the closing-day balance sheet on closing day, the true-up usually lands sixty to ninety days later.
For example
A business carries $600,000 of receivables and $250,000 of inventory against $450,000 of payables. Working capital is $400,000. If that is also the twelve-month norm, that is the peg.
If you are selling
A seasonal business can have wildly different working capital in March and October. Understand your own cycle before agreeing to a peg, because the wrong month as a baseline costs you real money at closing.
If you are buying
It is the difference between buying a functioning business and buying one you have to fund on week one. Define the calculation and the measurement date precisely in the agreement.
Related terms
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