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Working Capital in a Home Service Business Sale: What Sellers Need to Know
The working capital peg is one of the most misunderstood deal terms. Sellers lose $50K–$150K from it unexpectedly. Here's exactly how it works.
JT
Jason Taken
HedgeStone Business Advisors
Working capital is the most misunderstood aspect of home service business deal structure. Many sellers discover at closing that net proceeds are $50K–$150K less than expected because of a working capital adjustment they didn't fully understand. Here's how it works.
What Is Working Capital?
Working capital = Current Assets − Current Liabilities. Current assets: cash, accounts receivable (customer invoices unpaid), prepaid expenses, inventory. Current liabilities: accounts payable (vendor invoices owed), accrued wages, deferred revenue (prepaid services). Net working capital is what remains after subtracting liabilities from assets.
The Working Capital Peg
The peg is the target level of net working capital that must be in the business at closing, calculated as a trailing average (typically 3–6 months). If closing working capital meets the peg: no adjustment. If above: seller gets a dollar-for-dollar increase. If below: purchase price is reduced dollar-for-dollar. Example: $150K peg, actual = $120K → $30K purchase price reduction.
Why Sellers Get Surprised
Sellers who try to maximize distributions before closing (pulling cash, delaying invoice collection, or drawing down bank balances) arrive at closing with working capital below the peg — and face a price reduction that offsets what they distributed. Run the business normally through closing.
Negotiating the Working Capital Peg
Key negotiation points: the lookback period (3-month vs. 12-month average), inclusions and exclusions (whether prepaid insurance is included), and the collar (a range within which no adjustment triggers — a $25K collar means adjustments only apply if working capital misses the peg by more than $25K).
Frequently Asked Questions
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