Working Capital Peg Explained: Andrew Wilkinson & Tiny Make It Simple With Examples

‍

Working Capital Peg Explained: Andrew Wilkinson & Tiny Make It Simple With Examples is the straight, founder-friendly guide I use to turn a confusing price adjustment into clear money-in-your-pocket math.
You’ll see what a peg is, why it moves your net proceeds, and exactly how to calculate, negotiate, and document it.
I’ll write in plain English, keep every sentence on its own line, and give you copy-paste wording you can use today.
When I reference related ideas on focus and decision speed, I’ll link to posts from the site map for deeper context.

What a Working Capital Peg Really Is

A working capital peg is the target level of net working capital you agree to deliver at closing.
It protects both sides from gamesmanship on payables, receivables, inventory, and deferred revenue.
If you deliver more than the peg, you get a price increase.
If you deliver less, the price is reduced dollar for dollar.
It is the quiet paragraph that can swing six or seven figures at funding.

Why Andrew Wilkinson & Tiny Care About Pegs

I buy durable cash machines and I want a fair, fast, low-drama close.
A clear peg removes surprises and lets me lean into cash at close instead of complex earnouts.
It keeps incentives aligned and makes the closing statement a reconciliation, not a fight.
If you like decisive writing that gets faster replies, see our blog post: I Don’t Respond to Long Emails.

Cash-Free, Debt-Free, Normalized NWC in Plain English

Most deals are priced cash-free, debt-free.
That means we ignore excess cash and financial debt in the purchase price.
We then agree on a normalized net working capital target based on how the business actually runs.
Normalization means “what the business typically needs to operate without starving or overstuffing it.”

The Simple 12-Month Average Method I Start With

My default peg is the average monthly NWC over the last 12 months.
I exclude outliers caused by one-off events, not normal seasonality.
I use monthly snapshots, not just year-end, so we don’t miss swings.
This method is fair, fast, and hard to game.

Seasonality Adjustments Without the Drama

If your business peaks in Q4 and dips in Q1, I adjust the baseline.
I compare the same months year over year and weight recent months if the business has grown.
I document the logic in one paragraph the lawyers can paste into the SPA.
This keeps us from penalizing normal seasonal behavior.

What’s In vs What’s Out of Net Working Capital

In usually includes AR, inventory, prepaid expenses, and minus AP and accrued expenses.
Out usually excludes cash, debt, tax assets or liabilities, and anything non-operating.
I define these in the LOI so there’s no last-minute wordsmithing.
Plain English beats clever here.

Accounts Receivable: Bad Debt, Aging, and Reality

I peg AR net of a realistic bad-debt reserve.
I exclude very old receivables unless there is proof of imminent recovery.
I check that DSO has not mysteriously stretched in the last 60 days.
If your AR got “healthier” right before LOI, I will ask why.

Accounts Payable: No End-of-Deal Stretching

I prevent AP stretching by looking at average days payable over the year.
If AP spikes in the final weeks, I adjust to the normalized level.
I want a peg that reflects how you actually pay vendors, not a one-time squeeze.
This is fairness, not suspicion.

Deferred Revenue: The SaaS and Services Gotcha

Deferred revenue is a real liability because you owe the service.
I include deferred revenue in NWC and match it to related costs for symmetry.
If you pre-billed heavily right before close, I adjust the peg to neutralize the distortion.
This is where many founders lose money quietly.

Inventory: Obsolescence, Freight, and Write-Downs

I count inventory at lower of cost or net realizable value.
I exclude obsolete, damaged, or non-saleable stock unless it is valued properly.
I verify landed cost rules so freight and duties are treated consistently.
Inventory truth beats inventory optimism every time.

High-Growth Companies: Trailing vs Forward Pegs

If you are growing 50%+ year over year, the trailing average may understate needs.
I weight the last 3–6 months or use a forward-looking peg based on the current run-rate.
I document the method so the adjustment feels principled, not opportunistic.
This protects both of us at close.

How I Put the Peg in the LOI and SPA

I write one tight LOI paragraph that states the peg amount, the definition of NWC, and a dollar-for-dollar true-up.
In the SPA, I attach a schedule with inclusions, exclusions, and sample calculations.
I include a dispute mechanism limited to the peg math, not the whole agreement.
Short, specific wording saves weeks.

Negotiation Tactics That Increase Your Net

I trade headline for certainty.
I prefer a clean peg plus higher cash at close instead of a messy earnout.
I ask for one set of GAAP-consistent definitions and sample closing statements in the SPA.
Clarity here pays you more than a half-turn on the multiple.

How Pegs Interact With Earnouts and Rollover

A tight peg reduces the risk of “earning out” dollars that should have been cash at close.
If you want upside, I prefer rollover equity over a big earnout.
Rollover aligns incentives without moving the goalposts on definitions.
For how I think about compounding and taste, see: A $3,600 Keyboard and a $66 Million Dollar Investment.

Example 1: Calm B2B SaaS With Light Seasonality

You average $1.2M NWC across the last 12 months and your month-to-month swings are mild.
We set the peg at $1.2M with standard inclusions and exclusions.
At close, you deliver $1.35M NWC, so the price increases by $150K.
No debate, just math.

Example 2: Seasonal E-commerce With Q4 Spike

Your NWC averages $2.4M across 12 months, but Q4 averages $3.8M and Q1 averages $1.1M.
We set a seasonally adjusted peg using weighted months or a two-peg approach if close falls in Q4.
If you close December 15 with $3.6M, you are above the Q4 peg and get a positive adjustment.
If you closed in February, we would compare to the Q1 pegged level, not the annual average.

Build a Peg Model in 30 Minutes

Pull 12 monthly balance sheets and compute NWC each month.
Calculate average, median, and last-3-month average.
Flag outliers and annotate why they happened.
Draft a one-paragraph rationale and staple it to your LOI.
If you want a writing ritual that keeps you crisp, read: 02: Journaling With AI.

Red Flags That Slow or Kill Peg Agreements

AR that suddenly “improves” pre-LOI without a collections campaign.
AP that jumps in the last 30 days with no vendor story.
Inventory that only goes up and never gets written down.
Deferred revenue that doubles with no delivery plan.
Fix these now to convert earnout dollars to cash dollars.

Copy-Paste Peg Paragraph You Can Use

Working Capital Peg.
“The Purchase Price assumes the Company will deliver at Closing Net Working Capital equal to $[Peg Amount].
‘Net Working Capital’ means the current assets of the Business including accounts receivable (net of a reasonable reserve), inventory, and prepaid expenses, minus the current liabilities of the Business including accounts payable and accrued expenses, excluding cash and cash equivalents, indebtedness for borrowed money, shareholder loans, income tax assets and liabilities, and any non-operating or non-recurring items, all determined in accordance with GAAP applied consistently with the Company’s past practices.
To the extent the Closing Net Working Capital is greater than (or less than) the Peg Amount, the Purchase Price shall be increased (or decreased) dollar-for-dollar.”

Internal Links You’ll Probably Want While Prepping

For concise communication that speeds peg negotiations, read: I Don’t Respond to Long Emails.
For a story about capital allocation taste and long-term thinking, see: A $3,600 Keyboard and a $66 Million Dollar Investment.
For who I am and how I think, visit the About page.
For ongoing updates, check the Newsletter and the Podcast.
For a quick mindset reset on inbox discipline, skim: I Committed Email Suicide.

FAQs

What is a working capital peg in one sentence.
It is the target level of net working capital you promise to deliver at close, with a dollar-for-dollar price true-up if you miss or exceed it.

Why not just use year-end working capital.
Year-end can hide seasonality, so I use monthly averages and adjust for obvious one-offs.

What if my business is growing fast.
I weight recent months or agree on a forward-looking peg so you are not punished for growth.

Should deferred revenue be in the peg.
Yes, because it is a real obligation and affects cash the day after close.

How do we stop last-minute AR and AP games.
We compare DSO and DPO trends and cap changes to normalized levels.

Who prepares the closing statement.
Usually the buyer compiles it and the seller reviews against the SPA definitions and exhibits.

What if we disagree on the calculation.
Use a narrow dispute mechanism in the SPA that focuses only on peg math and sends disputes to a neutral accountant.

Can I trade peg complexity for higher cash at close.
Yes, and you often should, because clarity on the peg increases certainty on your net proceeds.

How big can the swing be.
Six figures is common and seven figures happens in inventory-heavy businesses.

Where do founders quietly lose money.
Vague definitions, no seasonal adjustment, and ignoring deferred revenue and bad-debt realities.

Conclusion

Working Capital Peg Explained: Andrew Wilkinson & Tiny Make It Simple With Examples is about protecting your net proceeds with one clean paragraph and a simple model.
Set the peg from monthly data, adjust for seasonality, define inclusions and exclusions, and lock a dollar-for-dollar true-up.
Trade complexity for clarity and you’ll close faster with more cash.
Get Your Copy of Never Enough at https://www.neverenough.com/

‍