What is Working Capital Peg?
The Short Answer
Working Capital Peg explained simply
The Working Capital Peg is a set amount of working capital that a seller agrees to leave in the business when it’s sold. This amount is usually based on the business’s historical operating needs. It makes sure the buyer has enough money to cover day-to-day expenses right after they take over. This prevents the buyer from having to put in extra cash immediately to keep things running smoothly.
Real-World Example
The Coffee Shop Sale
Imagine a coffee shop that typically needs $10,000 in working capital to cover inventory, payroll, and utilities each month. The buyer and seller agree on a Working Capital Peg of $10,000. If, at closing, the coffee shop only has $8,000 in working capital, the seller would need to add $2,000 to meet the peg. If it has $12,000, the buyer might get a credit for the extra $2,000, or the seller might take it out, depending on the deal terms.
Why this matters
The Working Capital Peg is important because it protects both the buyer and the seller. For the buyer, it guarantees they won’t be short on cash to run the business from day one. For the seller, it provides a clear target for the amount of working capital they need to leave behind, avoiding disputes after the sale.
Always make sure the Working Capital Peg is clearly defined in the purchase agreement. It should reflect the true operating needs of the business, not just a random number.
Always make sure the Working Capital Peg is clearly defined in the purchase agreement. It should reflect the true operating needs of the business, not just a random number.
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