Short answer: the working capital adjustment compares the net working capital you actually deliver at closing with a negotiated target (the peg). Every dollar below the peg comes out of your proceeds; every dollar above should be paid to you. For inventory-heavy, seasonal food distributors, how that peg is set can move hundreds of thousands of dollars.
- Purchase price adjustment = actual closing net working capital − the peg. It appears in more than 90% of private-target deals, according to SRS Acquiom.
- Food distributors are especially exposed because of large, perishable inventory, stretched receivables and payables, and seasonality.
- Set the peg to reflect your real seasonal cycle, define working capital precisely with a worked example in the agreement, and model the adjustment before you sign the LOI.
What is a working capital adjustment?
Nearly every private-company sale is priced on a cash-free, debt-free basis. The buyer assumes it is acquiring a business with a normal level of working capital — enough inventory, receivables in the pipeline, and payables outstanding to operate from day one without a cash injection.
To formalize that, the parties agree on a target level of net working capital, the peg. At closing, actual working capital is measured against it:
Purchase price adjustment = Actual closing net working capital − Target (the peg)
Below the peg, the buyer deducts the difference. Above it, the seller receives additional proceeds. The mechanism stops either side from gaming the balance sheet in the weeks before closing — for example, by aggressively collecting receivables, delaying supplier payments, or running down inventory.
This is now standard: SRS Acquiom's 2026 study of more than 1,500 private-target acquisitions found working capital adjustments in more than 90% of deals. If you sell a food distribution business, assume your deal will have one.
Why are food distributors especially exposed?
- Inventory is large and perishable. How short-dated or obsolete product is valued, and whether spoilage reserves are consistent, can swing the figure meaningfully.
- Receivables and payables are stretched. One large customer paying early — or a major supplier invoice landing the week of closing — can distort the snapshot.
- Seasonality is unavoidable. Many food businesses build inventory before peak periods and draw it down afterward. A peg set on a flat twelve-month average can be a target that is impossible to hit at certain times of the year.
Worked example: how seasonality moves the money
Consider a hypothetical distributor whose net working capital averages $3.0 million over twelve months, but runs at $2.6 million in its post-holiday trough and $3.4 million before peak season.
| Scenario | Peg | Actual at close | Adjustment to seller |
|---|---|---|---|
| Flat 12-month peg, close in the trough | $3.0M | $2.6M | −$400,000 |
| Seasonal peg matched to closing month | $2.6M | $2.6M | $0 |
| Flat 12-month peg, close before peak | $3.0M | $3.4M | +$400,000 |
Same business, same headline price — an $800,000 swing depending on how the peg and closing date line up. (Illustrative figures only.)
Where do sellers lose money in the negotiation?
The methodology. A trailing average works for steady businesses; for seasonal distributors, match the peg to the expected closing period or use a seasonal average.
The definitions. Are deferred revenue, accrued bonuses, or customer rebates included? How is slow-moving inventory reserved? Settle these in writing, with a sample calculation attached, not during the post-closing true-up.
The timing. Because working capital moves with the season, your target closing date is itself a lever. Discuss it before the letter of intent is signed.
What should sellers do before going to market?
- Reserve appropriately for obsolete and short-dated inventory, reconcile receivables, and resolve stale payables before diligence.
- Build a month-by-month picture of net working capital across at least two full years.
- Insist on a precise definition and a worked example in the purchase agreement.
- Model the adjustment against any proposed peg before you sign.
Frequently asked questions
What is a net working capital peg?
It is the target level of net working capital — typically receivables plus inventory minus payables and accrued liabilities, excluding cash and debt — that the buyer and seller agree a normally operating business should have at closing. The purchase price is adjusted up or down by the difference between the actual closing amount and the peg.
How is the working capital peg calculated?
Most often as a trailing average of monthly net working capital, commonly over twelve months. For seasonal businesses, a peg matched to the expected closing month or a seasonal average usually reflects reality better than a flat annual average.
How common are working capital adjustments?
Very. SRS Acquiom's 2026 study of more than 1,500 private-target acquisitions found working capital purchase price adjustments in more than 90% of transactions.
How can a seller avoid a working capital dispute after closing?
Define exactly which accounts are included, how inventory reserves and rebates are treated, and attach a sample calculation to the purchase agreement. Clean up the balance sheet before diligence and model the expected adjustment before signing.
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This page is general education, not legal, tax, valuation, or financial advice. Every business is different; talk to qualified advisors about your specific situation.