Working capital peg

Working capital peg — the negotiated “normal” working capital (inventory + receivables − payables) that must be present at closing, with the price adjusted peso-for-peso for any shortfall or excess. Without a peg, a seller rationally collects his receivables, runs inventory to zero, and delivers a business that needs immediate new cash to operate — a hidden price increase. Setting the peg forces the question the books were avoiding anyway: what does normal actually look like in this business?

First used in: 4.2 · Buying cash flow: acquisition I