Can anyone help with working-capital-peg calculations?

April 07, 2026

by an intermediary from University of British Columbia - Sauder School of Business in Vancouver, BC, Canada

We are in the process of acquiring a business and want to calculate the working capital target. We do have the monthly P&L’s of the business which are maintained on a cash basis. The profits vary depending on the incoming cashflows. Some months there is negative cashflow and positive for others. Pay Cycle: About 20-30% of the payments are received right away###-###-#### % are received###-###-#### months later. Here is the language from our LOI: The Purchase Price assumes the Business is purchased: (i) on a debt-free basis, (ii) with a sufficient amount of working capital of 2 months (based on historical levels and subject to determination during the Purchaser’s due diligence investigation) to continue normal operations. What formula/method would you use to calculate the target working capital based on the information above?

Reply by a professional
from The University of Texas at Austin in Ann Arbor, MI, USA

thanks for the tag ^redacted‌. NWC pegs can be tricky, especially for cash-basis businesses where the financials don't reflect true working capital needs. Since the business runs on cash-basis accounting, your monthly balance sheet won't directly show you receivables or payables, which are the building blocks of a traditional NWC calculation. You'll need to reconstruct an accrual-like picture to get a meaningful target. Otherwise you're just measuring cash timing, not actual working capital needs. For the formula, the standard approach is to calculate NWC as current assets (receivables, prepaid expenses, inventory, other current assets) minus current liabilities (payables, accrued expenses, deferred revenue, other current liabilities), excluding cash and debt. Then take a trailing average, typically 12 months, to smooth out the monthly swings you're describing. Given the pay cycle you mentioned###-###-#### % collected###-###-#### months out), you likely have a meaningful receivables balance at any given time that won't show up on cash-basis statements. You'll want to estimate what that receivables figure looks like month to month and layer it in. For the "2 months of working capital" language in your LOI, I'd clarify whether that means 2 months of operating expenses covered by NWC, or a trailing 2-month average of NWC levels. Those are very different numbers and that ambiguity could become a negotiation headache at closing. In terms of protecting yourself, including a NWC peg with a true-up mechanism in the purchase agreement (dollar-for-dollar adjustment above or below the target, sometimes with a collar) is one of the better ways to derisk this as a buyer. It keeps the seller honest about not draining working capital between signing and closing, and gives you a defined baseline for what "sufficient" actually means. Sellers will sometimes push to strike NWC adjustments or clauses entirely, and in some deal dynamics they have the leverage to do it. But as a buyer, you can always ask for it. Would also strongly recommend having a QoE provider look at this to reconstruct the accrual-basis NWC picture. Happy to discuss further if helpful. Thanks, Matt

Reply by a searcher
from Gonzaga University in Denver, CO, USA

Yeah this one gets really hairy really quick. Are you paying any outside advisors for a review of the financials or a QoE? I would highly suggest using one and asking them to include a NWC analysis

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