Why the Peg Is Not the Whole Working Capital Story

The peg is useful. It gives both sides a reference point, a negotiation anchor, and a starting assumption for the working capital adjustment. But in M&A, a starting assumption is not the same as an operating reality. That distinction matters, especially for private equity buyers and strategic acquirers who need clarity on cash, not just a headline number.

Too often, the peg is treated as if it captures the full cash behavior of the business. It does not. A company can sign on a normalized working capital number and still close into a very different position because the business does not move in a straight line. Inventory can build ahead of peak season. Customer prepayments can pull cash forward. Payables can be stretched in one part of the cycle and then return to normal later. None of that is unusual. What is unusual is assuming a single balance sheet date tells the whole story.

The problem with a single-date view

A closing balance sheet is only one point in time. If that date happens to fall in a favorable part of the cycle, the buyer may think the business is more cash-efficient than it really is. If it falls in an unfavorable period, the seller may be accused of a shortfall that is actually seasonal, repeatable, and entirely consistent with the operating pattern. In both cases, the peg can create false confidence.

That is why the real question is not whether the peg was agreed. The real question is whether the peg reflects the monthly rhythm of the business. Without that context, the buyer may discover after signing that the cash need at close is materially different from what the headline number suggested. At that point, the debate becomes less about valuation and more about allocation of risk.

What a 12-month view reveals

We prefer a full 12-month view because it separates repeatable seasonality from true leakage. That distinction is critical. Seasonality is part of the business model. Leakage is not. A buyer should not pay for a working capital dip that only exists because of timing, nor should a seller be penalized for a predictable seasonal build that reverses later.

A 12-month analysis helps answer a more practical question: how much cash does the business actually need once the post-close plan starts? That is the number that matters for integration, liquidity planning, and day-one operating stability. It also helps the buyer understand whether the business is being acquired with a genuine funding requirement or simply entering a normal part of its cycle.

For more on how we frame this analysis in transaction settings, see Riskova.

Why SPA mechanics need to be tested early

The working capital discussion should not stop at commercial analysis. Before signing, the adjustment mechanics in the SPA need to be tested carefully so the buyer is not arguing about the gap after close. If the mechanics are vague, the parties can spend more time disputing the calculation than actually understanding the business.

That is where disciplined drafting matters. The definition of the peg, the treatment of seasonality, and the mechanics for the closing adjustment all need to line up. If they do not, the buyer may have a theoretically sound model and still face an avoidable dispute.

Where Riskova sees the real issue

Riskova sees this problem when the peg is treated as a finish line instead of a starting point. In our view, the peg should be tested against the operating cycle, not simply accepted as a proxy for cash need. That approach gives buyers a clearer view of the business they are actually acquiring and reduces the chance of surprises at close.

For PE associates, M&A directors, and business buyers, the lesson is simple: do not confuse a negotiated number with a complete working capital story. A sound deal process looks beyond the peg, checks the monthly pattern, and confirms the real cash requirement before the ink is dry.