How to Answer “What is a working capital peg (target) in an acquisition, and how does it work?” in Investment Banking Interviews

A working capital peg (or working capital target) is the agreed “normal” level of operating net working capital the seller is expected to deliver at closing. The purpose is economic: it ensures the buyer receives a business that can run day-to-day without an immediate cash injection, and it prevents either side from benefiting from short-term working capital management right around closing.

Link it to how deals are priced. Most acquisitions are agreed on a cash-free/debt-free basis: the buyer expects to get the operating business with a normal level of AR, inventory, AP, and accruals. If the seller delivers unusually low working capital (for example, by collecting receivables aggressively or stretching payables), the buyer would effectively be funding operations post-close. The peg is the baseline used to correct that via a purchase price adjustment.

Explain the mechanism in plain steps. The SPA defines how “net working capital” is calculated and what’s included/excluded (often with consistency to historical accounting policies). Around closing, the parties prepare an estimate of closing net working capital and compare it to the peg.

The difference becomes a purchase price adjustment: if closing NWC is above the peg, the buyer is effectively receiving more operating capital than agreed, so the buyer typically pays more (equity price increases). If closing NWC is below the peg, the buyer receives a shortfall and typically pays less (equity price decreases).

In practice, there’s often (i) a closing estimate used to fund the transaction and (ii) a post-close true-up once the final closing statement is prepared and disputes (if any) are resolved. Keep your explanation focused on directionality and timing.

Highlight that this is not a textbook working capital definition; it’s a deal-defined metric. “Operating” working capital commonly includes items like accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses—but the exact list is negotiated.

Many debates are about classification: what sits in net debt versus working capital, and what is excluded entirely. Depending on the deal, parties may exclude cash, interest-bearing debt, tax balances, certain provisions/reserves, intercompany items, or unusual accruals. Even when both sides agree on the line items, they may disagree on policies (e.g., revenue recognition affecting deferred revenue, inventory reserves, or allowance for doubtful accounts).

This is a key point for investment banking interview questions on working capital: small definition changes can shift value, so analysts need to understand the economic intent and the technical calculation.

Use a simple example to prove you understand the adjustment. Example: peg = $50m of net working capital. Closing NWC = $45m. That’s a $5m shortfall, so the buyer typically gets a $5m reduction in equity purchase price (or receives $5m via the true-up mechanism, depending on how it’s settled).

Then connect it to financial modeling: in sources & uses, you start with headline equity value (enterprise value minus net debt and other agreed adjustments). The working capital adjustment is a separate line item that changes equity consideration; timing depends on whether it’s settled at close, post-close, or split (estimate at close, true-up later).

Finish with intuition: the peg is a price-protection tool that prevents either side from effectively borrowing from the other by managing receivables, payables, or inventory immediately before closing.