Two parties agree a sale price for a business, sign a contract, and start planning what comes next. Ten weeks later, at completion, the amount that actually lands in the seller’s account is lower than the number everyone had been discussing for months. The multiple has not moved. The EBITDA figure has not been reopened. What moved was a clause sitting quietly in the schedules of the sale agreement, dealing with something almost nobody spent much time on at the negotiating table: working capital.
This mechanism, usually called a completion accounts adjustment or a working capital peg, exists in most business sales above a modest size, and it is entirely standard practice. It is also one of the least understood parts of a transaction from the seller’s side, because negotiation energy tends to go almost entirely into the multiple and the earnings base, not into what happens to price in the gap between signing and completion.
By the time the adjustment shows up on the completion statement, there is very little room left to argue it. The target was set weeks or months earlier, the mechanism was already sitting in the contract both parties signed, and the only real question left is whether the actual number on completion day lands above or below that target. Understanding how the peg works, and what moves it, is worth doing long before a sale process ever starts.
What a Working Capital Peg Actually Locks In
A working capital peg sets a target level, usually the trailing twelve month average of debtors plus stock less creditors, representing the normal amount of working capital needed to keep the business trading day to day. The buyer is, in effect, paying for a business that comes with that “normal” level of working capital already sitting inside it on day one of new ownership.
If the actual position on completion day sits below that target, the purchase price is reduced, usually dollar for dollar. If it sits above, the price is increased on the same logic. This sits entirely apart from the EBITDA multiple and the normalisation adjustments argued over earlier in the process. It is a second, independent lever on the final number, calculated after the multiple has already been agreed and the ink is effectively dry on everything else.
Why the Number Moves Between Signing and Completion
The gap between signing and completion, often six to twelve weeks, is exactly when an owner’s attention shifts toward lawyers, disclosure schedules and due diligence requests, and away from the daily discipline of chasing debtors and managing stock. This is the pattern we see across owner-led businesses moving through a sale process: collections slow down slightly, stock is allowed to build a little more than usual, supplier payment timing drifts, all while nobody is deliberately doing anything differently. Each of those small drifts moves the completion working capital number, and the peg mechanism means every one of them carries a direct dollar effect on what the seller actually receives.
Setting the Peg Before Due Diligence Starts
The target itself gets negotiated, usually off historical averages pulled straight from the accounts, and a business that has been carrying loose or undocumented working capital across debtors, inventory and payables walks into that negotiation at a disadvantage. A peg set too high, based on an unusually strong historical period, becomes difficult for the business to sustain through to completion, and the shortfall becomes an unplanned discount on the sale price nobody budgeted for.
A Working Capital Unlock project, run well before a sale process opens, maps exactly where cash sits across debtors, inventory, work in progress and supplier terms, and gives an owner a clean, defensible picture of what a genuinely normal working capital level looks like for their business. That is the same data a buyer’s advisers will build their peg proposal from, and walking into the negotiation already holding it is worth more than any argument made after completion has passed. Reading through how exit readiness gets assessed before a process opens tends to prevent the same kind of late surprise.
None of this shows up in the two lines most people hear about what a business sold for, but it can be worth a meaningful slice of the headline number. A conversation with a business valuation specialist before terms are agreed, rather than after, is usually the difference between a peg that reflects the business as it actually runs and one that quietly erodes what the owner takes home.
Frequently asked questions
What is a working capital peg in a business sale contract?
A working capital peg is a target level, usually the trailing twelve month average of debtors plus stock less creditors, written into a sale contract to represent the normal working capital a business needs to keep trading. If the actual position at completion sits below or above that target, the purchase price adjusts to match, separately from the earnings multiple agreed earlier in the deal.
How can a completion accounts adjustment reduce my final sale price?
If debtors, stock and creditors on completion day sit below the working capital target set in the contract, the shortfall is usually deducted from the purchase price dollar for dollar. This can happen even when the business has traded normally, simply because collections or stock levels drifted slightly during the weeks between signing and completion. An exit readiness review checks this exposure before it becomes a surprise.
Why does working capital change between signing and completing a sale?
The signing to completion period, often six to twelve weeks, is when owner attention typically shifts toward lawyers and due diligence and away from the daily rhythm of collections and stock management. Small, ordinary drifts in debtor days or inventory levels during that window can move the completion working capital number enough to change what actually lands in the seller’s account.
How is the working capital target set during a business sale negotiation?
The target is usually negotiated from historical averages taken directly from the business’s own accounts, often the trailing twelve months of debtors, stock and creditors. A business with clean, well-documented working capital data walks into that negotiation with a stronger position than one relying on the buyer’s advisers to set the benchmark. A Working Capital Unlock project builds that data in advance.
What should I do before due diligence starts on a business sale?
Build a clear, historical picture of working capital, debtors, stock, work in progress and payables, well before a buyer’s advisers start asking questions, so the numbers presented are the same ones the business can defend under scrutiny. Reviewing exit readiness early gives enough runway to fix anything that would otherwise surface mid negotiation.
Does a working capital peg apply to every Australian business sale?
Smaller, simpler transactions sometimes skip a formal peg mechanism, but the underlying principle rarely disappears entirely. Most buyers still expect a business to be handed over with a reasonable, normal level of working capital intact, and will address any shortfall through price or warranties even where no formal completion accounts clause exists.
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