💡 Introduction: Why This Topic Matters
Working capital pegs and closing true-ups can feel like legal fine print, but they move real money. A poorly structured peg can wipe out the benefit of a sharp purchase price or introduce disputes that consume months after closing. For buyers, it’s the protection against sellers draining working capital before completion. For sellers, it’s the safeguard against buyers setting an unrealistically high “normal” level. The schedule that underpins this mechanism must connect cleanly to your operating cash flow model, sources & uses, and post-acquisition working capital program. This guide shows CFOs, operators, and deal teams how to design peg and true-up schedules that stand up to scrutiny, integrate with valuation, and translate directly into reliable cash views.
🧩 A Simple Framework You Can Use
Use a three-part structure:
- Define normal working capital: based on historic averages and trends, adjusted for seasonality, growth, and one-offs.
- Set the peg: a fixed or formula-based level that flows into your SPA and sources & uses schedule.
- Model the true-up: mechanics that compare actual working capital at close with the peg and convert differences into cash flow statements at close and post-close.
Treat this as part of your core cash flow forecasting model, not a side calculation. Once in place, the same structure can support post-acquisition tracking and improvement initiatives.
🛠️ Step-by-Step Implementation
Step 1: Define or prepare the essential starting point
Begin by collecting historic balance sheet data for key working capital components: receivables, inventory, payables, and any relevant contract assets/liabilities. Use at least 12-24 months to capture seasonality and trends. Decide on the business perimeter that the peg will cover, especially in carve-outs.
Next, align on definitions: which items are in scope (e.g., specific accruals, deferred revenue) and which are explicitly excluded. Reconcile these definitions with your cash flow model and M&A accounting treatment so there are no hidden mismatches later. Finally, consider how growth and operational changes affect “normal” working capital – a growing business may need higher absolute balances even if days metrics are stable. This foundation lets you propose a peg grounded in data, not negotiation noise.
Step 2: Walk through the first major action – calculate normal working capital
Using the historic data, compute average working capital across relevant periods, ideally normalised for one-offs such as large pre-buys, strikes, or exceptional promotions. You can do this in absolute terms and as days metrics (DSO, DIO, DPO). Evaluate whether the business shows structural changes, such as tightening terms or shifting customer mix. Where volatility is high, consider using a range or seasonally adjusted view instead of a single point. These calculations should live in your modelling environment, not just in a spreadsheet sent by advisers, so they can feed into both your DCF and 13-week views. The output is a data-backed “normal” working capital profile that will anchor peg discussions and later performance tracking.
Step 3: Introduce the next progression – set the peg and embed it in models
With normal working capital defined, propose a peg. This might be a simple average, a seasonally-adjusted level for the expected closing month, or a negotiated compromise within a range. Once agreed, hard-code the peg as a driver in your cash flow forecasting model and sources & uses schedule. Show clearly how deviations at close will convert into cash flow in mergers: if actual working capital is below the peg, the buyer injects cash; if above, the sellers receive additional proceeds. Reflect this logic in closing-period cash flow statements and cash balances. By embedding peg mechanics in your main model, you can immediately see the impact on leverage, liquidity, and returns under different close-date scenarios.
Step 4: Guide through an advanced or detail-heavy action – model the true-up mechanics
Next, design the true-up schedule that will run post-close. Define measurement date(s), adjustment period, dispute process, and any caps or collars. In the model, create a small module that compares actual working capital at close (or at the completion accounts date)to the peg and calculates the resulting cash transfer. Include timing flags to show when that cash moves – often several weeks after close – and feed this into your short-term cash flow model and headroom analysis. Consider edge cases, such as disputes, partial settlements, or earnout linkages. Align the schedule with your M&A accounting treatment so the same numbers drive both legal settlement and financial reporting. This level of explicitness is what makes schedules “hold up” under negotiation and audit.
Step 5: Bring everything together and prepare for the outcome or completion
Finally, connect the peg and true-up logic to your broader deal and post-acquisition plans. In your DCF and investment case, show returns both before and after working capital optimisation, using the same discounted cash flow model you used to value the deal. In your post-acquisition cash plan, translate working capital targets into actionable initiatives by line item – collections, payables, inventory -and track progress using the same schedule that underpinned the peg. Use regular reviews to compare actual working capital at reporting dates with the “normal” profile you used for negotiations. Over time, this creates a full loop: the peg is informed by data, executed cleanly at close, and then used as a baseline for continuous improvement.
📌 Real-World Examples
A sponsor acquires a multi-site distribution business with highly seasonal inventory. Rather than use a simple trailing 12-month average, they build a seasonality-adjusted working capital profile and set a peg specific to the expected closing month. The peg and true-up mechanics are embedded into the deal cash flow model, sources & uses, and 13-week headroom view. When close is delayed by a quarter, they can quickly recalculate what “normal” looks like for the new date and adjust SPA schedules accordingly. Post close, the same working capital schedule becomes the backbone of a program to reduce DSO and improve payables terms. Because everything runs through one integrated model, management, lenders, and investors see the same numbers at every stage.
⚠️ Common Mistakes to Avoid
The most common mistake is treating the peg as a negotiation number, not a data-backed metric. That leads to mispriced risk and difficult conversations post close. Another error is defining working capital too loosely – including items like cash, tax balances, or unrelated accruals – which distorts both peg and true-up. Teams also frequently keep peg schedules in isolated workbooks, disconnected from the main cash flow forecasting model and sources & uses. Finally, they ignore seasonality, using a flat average that doesn’t reflect the actual closing period. The cure: ground the peg in historic data, codify definitions, embed mechanics into your core cash flow model, and reuse the same schedule for post-acquisition tracking.
➡️ Next Steps
To embed working capital pegs and true-ups into your deal playbook, start by standardising your schedule template and integrating it into every M&A cash flow model you run. Link it directly to sources & uses, 13-week cash headroom, and post-acquisition working capital improvement plans. Then, build a small library of real peg and true-up outcomes from past deals, comparing what you expected at signing with what actually happened at close and beyond. This feedback loop will sharpen your negotiations, improve your modelling assumptions, and tighten alignment between investment cases and real cash performance. Over time, your team will treat peg and true-up modelling with the same discipline as valuation and debt – and your deals will be stronger for it.
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