What is a working capital peg in an M&A deal?
A working capital peg is a negotiated benchmark for current assets minus current liabilities that the target business must deliver at closing, with any shortfall or surplus adjusting the purchase price dollar for dollar.
Quick answer
A working capital peg is the target level of net working capital the buyer expects at close; delivery above or below the peg results in a dollar-for-dollar purchase price adjustment, typically reducing a headline price by 3 to 8 percent at close.
The detail
The peg is set based on a trailing 12-month average of monthly working capital, usually excluding cash and debt (the deal is transacted on a cash-free, debt-free basis). Common items inside the peg: accounts receivable, inventory, prepaid expenses, accounts payable, accrued payroll, accrued vacation, and accrued expenses. If closing working capital is below the peg, the seller owes the buyer the difference. If above, the buyer pays the seller extra. The peg is a common area of retrade — buyers argue for a higher peg (which effectively reduces the purchase price) and sellers argue for a lower peg. Healthcare-specific complications: aged AR discounts, payer mix changes, and seasonal fluctuations in collections can all affect how a normal peg should be defined. Sellers who do not engage finance advisors to stress-test the peg calculation routinely leave 2 to 5 percent of enterprise value on the table at close.
Working capital peg adjustments commonly reduce healthcare deal purchase prices by 3 to 8 percent at close versus LOI headline.
Most working capital pegs are set on a trailing 12-month average, but the trailing 3 or 6 month average can favor one side depending on trend.
Source: AICPA M&A Practice Guidance
What this means for clinic owners
From Sorso
The working capital peg is where sophisticated buyers quietly claw back 3 to 8 percent of the headline price. Sellers who negotiate the multiple hard and then rubber-stamp the peg language lose real money. Have a finance advisor model the peg under multiple methodologies before signing the LOI.
Related questions
How do PE firms value medical practices?
Private equity firms value medical practices primarily on a multiple of trailing twelve-month adjusted EBITDA, typically 5x to 12x, with the multiple driven by scale, growth, payer mix, and provider retention.
What is a quality of earnings report?
A quality of earnings (QoE) report is a buyer-commissioned financial due diligence analysis that normalizes EBITDA, tests the reliability of revenue and expenses, and identifies risks that affect purchase price, typically costing $50K to $150K for a healthcare practice.
What is an LOI in healthcare M&A?
A letter of intent (LOI) in healthcare M&A is a non-binding agreement that sets the proposed purchase price, structure, exclusivity period, and diligence timeline before a buyer commits the resources to close a deal.
What is rollover equity in a practice sale?
Rollover equity is the portion of sale proceeds that the selling owner retains as equity in the buyer's platform, typically 15 to 30 percent of total consideration, creating a second liquidity event when the platform is later sold.
Founder of Sorso. 19 years in corporate finance. Managed a $450M loan portfolio before building a fractional CFO firm exclusively for healthcare clinics.
Want to see how your practice measures up?
Take the 4-minute financial assessment. It is free, and it will show you where your practice is leaking money.