A working capital target is the normal level of short-term assets and liabilities a buyer expects to remain in a business at completion. If actual working capital falls below that target, the seller’s proceeds usually reduce pound for pound.
The headline price is not always the money that ends up in your bank account. In many SME sales, the working capital target, often called the peg, can move the final proceeds up or down at completion.
If you are selling because you want a clean exit, that detail matters. A strong valuation can still turn into a weaker result if the deal terms around working capital are off.
Before you get carried away by the offer price, look at the mechanics underneath it.
Key Takeaways
- A working capital target, also called the peg, is the normal level of short-term assets and liabilities a buyer expects to remain in the business at completion.
- If actual working capital is below the agreed target, the buyer will usually reduce the sale price pound for pound. If it is above the target, the seller may receive an uplift.
- The fair target should be based on normal trading over the previous 6 to 12 months, with proper allowance for seasonality, one-off items, stock levels, debtors, creditors, and accruals.
- Sellers should agree and test the working capital peg before heads of terms are finalised, rather than treating it as an administrative detail after the headline price is agreed.
- A professional review of the working capital position can help protect the proceeds the seller actually receives at completion.
What a working capital target really means in a business sale
A working capital target is the amount of day-to-day funding the buyer expects to be left in the business on completion. It is there so the company can carry on trading straight after the sale, without an awkward cash squeeze in week one.
In plain English, it is the normal level of short-term assets and liabilities the business needs to keep moving. That usually means trade debtors, stock, prepayments, trade creditors, accruals, and similar balance sheet items. It is not the same as cash in the bank, and it is not the same as profit.
That is why working capital targets in SME business sales matter so much. They sit right in the middle of the handover between seller and buyer.
The simple maths behind current assets and current liabilities
Current assets are the bits of the business that should turn into cash within a year. Think debtors who owe you money, stock sitting on the shelf, and prepayments you have already made.
Current liabilities are the short-term bills that still need paying. Think suppliers, payroll accruals, VAT, and other amounts due soon.
Working capital is usually the difference between those two sides. A business with £300,000 of current assets and £220,000 of current liabilities has £80,000 of working capital.
That is why this number can feel slippery. A business might be profitable and still have weak working capital. It might also have plenty of cash, but if debtors are slow and stock is bloated, the business can still be under pressure.
Why buyers insist on a normal level of working capital
From the buyer’s point of view, a sale should not leave them with a starved business. If working capital is too low, they may have to inject cash straight after completion just to keep suppliers paid and orders moving.
That is not what they agreed to buy. They bought a trading business, not a fire drill.
So the target is not there to be awkward. It is there to protect deal continuity. The buyer wants a fair starting point, and the seller wants the agreed value to hold up when the deal closes. Both sides should care about the same thing, a business that can keep running without drama.
How does the working capital peg change the final sale price?
Once the headline number is agreed, the working capital target can still change what you actually receive. If the actual working capital at completion is below the target, the buyer usually cuts the price pound for pound. If it is above the target, the seller may receive an uplift.
That is the hidden price chip. It sits there quietly until completion accounts are done, then it turns into cash.
A small gap in working capital can become a direct hit to sale proceeds. There is no mystery about the maths.
Why a small gap can become a big deduction
Say the buyer and seller agree a target of £400,000. On completion day, the actual working capital is only £360,000.
That £40,000 shortfall is usually deducted from the price.
Now imagine the headline price was £2.5 million. A £40,000 swing may not sound huge in isolation, but it is real money. It pays advisers, tax bills, or part of the next stage of life after the exit. In many SME deals, the difference between a clean finish and a frustrating one is not massive in percentage terms. It is in the detail.
The reverse is true as well. If the business carries more working capital than the peg, the seller can get paid extra. That is why the number has to be fair, not guessed.
The hidden risk of agreeing the price before the peg is settled
This is where sellers get caught out. The focus goes to the valuation, the headline multiple, and the size of the offer. The working capital mechanics can feel like admin, so they get left until later.
That is a mistake.
The peg is often negotiated after the first excitement of heads of terms. If you do not watch it closely, the final proceeds can drift lower without the headline price changing at all. The offer still looks strong on paper. The bank transfer tells a different story.
The deal may feel won. The cash says otherwise.
What can make a working capital peg too high or too low?
A working capital target is only as good as the data behind it. Get the base period wrong, and the peg can be too high or too low. Either way, one side ends up with a deal that feels unfair.
This is where a proper valuation review matters. Working capital should not be pulled from a quick glance at year-end accounts. It needs context, timing, and a clean look at what was normal for the business.
If you want the wider picture on cash conversion and deal adjustments, normalised EBITDA and quality of earnings analysis is part of the same conversation.
Using the wrong historic period can skew the target
One year of accounts rarely tells the whole story. Seasonal businesses need a longer view. A retailer, wholesaler, or product-led business may build stock months before a busy period. A services business may see debtors rise after a surge in work.
One-off shocks matter too. A late payment cycle, a rush order, a supply issue, or a growth spike can distort the figures. If you use the wrong month, or even the wrong year, the peg can come out too harsh or too generous.
A sensible review period should reflect normal trading, not the odd moment when the numbers were out of line.
Normalising items that do not reflect day-to-day trading
Some balance sheet items need a second look before they are used in the peg.
One-off costs can distort accruals. Unusual debtor balances can make the business look stronger than it is. Excess stock may be sitting there because of a buying decision that won’t repeat. Non-recurring liabilities can also drag the figure down for no good reason.
These items need cleaning up so the target reflects the real business, not a snapshot twisted by timing. That is not about dressing the numbers up. It is about stopping the wrong numbers from setting the price.
Accounting choices that change the result
Working capital also changes with accounting policy. What is included in stock? How are prepayments treated? Are accruals being recognised in the same way throughout the period?
These may sound like technical questions, but they change the answer. A buyer and seller can look at the same business and still land on different figures if one side uses a stricter classification than the other.
That is why completion accounts can become a battleground. The cleaner the accounting position before you go to market, the less room there is for disputes later.
How to protect your exit value before you go to market
The best time to deal with the peg is before the deal process gets busy. Once the buyer is circling, your room for manoeuvre shrinks. If you prepare early, you can spot weak points and fix them before they cost you money.
Start with a clean monthly picture. Keep debtors, stock, creditors, and accruals tidy and consistent. Review them properly, not only at year-end. If a balance looks odd, ask why it is odd.
Then test the likely peg before heads of terms are signed. Ask a simple question, does this target feel fair across the last 6 to 12 months, or is it leaning hard in one direction? If the answer feels uncomfortable, it probably is.
At Consult EFC, a partner-led view helps UK SME owners check the numbers early, before the sale process starts to squeeze them. A professional business valuation for exit planning gives you a defensible starting point, which is what you want when a buyer starts probing the mechanics.
A few practical checks can save a lot of pain later:
- Review the last 12 months of working capital, not just the latest month.
- Strip out one-offs that do not belong in the normal trading picture.
- Check whether seasonality changes the fair target.
- Make sure the accounting treatment is consistent.
- Stress-test the final proceeds under a few completion scenarios.
That is not overkill. It is basic deal hygiene.
Frequently Asked Questions About Working Capital Targets in UK Business Sales
What is a working capital target in a business sale?
A working capital target, often called the peg, is the normal level of short-term funding the buyer expects to be left in the business at completion. It usually includes trade debtors, stock, prepayments, trade creditors, accruals, and similar balance sheet items.
How does working capital affect the final sale price?
If the actual working capital at completion is below the agreed target, the buyer will usually reduce the price by the shortfall. If the business has more working capital than the target, the seller may receive an additional payment, depending on the deal terms.
How is a fair working capital peg calculated?
A fair peg should reflect the business’s normal trading pattern, usually based on at least 6 to 12 months of monthly data. The review should consider seasonality, unusual debtor or creditor balances, excess stock, one-off costs, accruals, and the accounting policies used to prepare the figures.
When should a seller agree the working capital target?
The target should be reviewed before heads of terms are signed and settled before the transaction reaches completion accounts. Agreeing the headline price first and leaving the peg until later can create a direct reduction in the final proceeds.
Is working capital the same as cash or profit?
No. Working capital is usually the difference between current assets and current liabilities. A business can be profitable and still have weak working capital if customers pay slowly, stock is too high, or short-term liabilities are building up.
Final Thoughts from Consult EFC
A working capital target can be a hidden price chip, and it can change your exit value without changing the headline offer at all. If the peg is too high, or simply wrong for the way your business trades, you can lose cash at completion that you thought was already yours.
The lesson is simple. Look beyond the price on the page and into the mechanics underneath it. Review the target early, clean up the numbers, and go into the sale with a clear view of what the deal will actually pay.
A strong exit is not just about the valuation. It is about keeping hold of the value you were promised.
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Over 12 years across Big Four audit, Investment Banking and corporate advisory. Kishen works with UK SMEs on valuations, exit planning, fundraising and financial strategy. ICAEW regulated. Big Four trained. Based in London.