Net Working Capital Peg Negotiation Guide

Most deals die in the final 30 days over Net Working Capital disputes. You present your adjusted peg calculation. The seller feels blindsided. Their advisor accuses you of retrading. Trust evaporates exactly when you need it most. The cost is enormous. Deals collapse after six figures in diligence costs. Relationships sour. Good acquisitions slip away because neither party knows how to navigate NWC adjustments professionally. The solution is a systematic approach to working capital diligence that builds consensus rather than conflict. You identify adjustments early, document them thoroughly, justify them with data, and present them as collaborative problem-solving rather than adversarial negotiation. This guide gives you the five-step framework elite buyers use to negotiate NWC adjustments that stick. You'll learn how to spot non-operational items, build an airtight adjustment case, and present findings in a way that preserves deal momentum. Follow this methodology and you'll close deals at fair prices without the eleventh-hour drama that kills most transactions. ? Outcomes - Identify 5-12 diligence adjustments to reported NWC within the first 45 days of diligence, giving you time to build consensus before purchase agreement drafting - Reduce post-close working capital disputes by 80% through detailed definitions and calculation examples in the purchase agreement - Negotiate $500K-$2M+ in legitimate adjustments without triggering seller defensiveness or retrade accusations - Build a documented adjustment case that survives seller advisor scrutiny and supports your valuation position - Close deals###-###-#### days faster by resolving NWC methodology early instead of fighting over it during purchase agreement negotiation 🧾 How to Use This Resource - Use this if you're a buyer (PE fund, search fund, strategic acquirer) currently in diligence on a deal where the seller provided only reported NWC figures without discussing adjustments - Apply this framework during your first 60 days of diligence, before the purchase agreement draft, when you have maximum flexibility to identify and discuss adjustments collaboratively - You'll need access to the target's monthly balance sheets (12+ months), detailed general ledger for current assets and liabilities, and management availability for 2-3 working capital deep-dive calls - Plan 6-8 hours spread across 3-4 weeks: initial analysis (2 hours), GL deep-dive (3 hours), adjustment documentation (2 hours), presentation prep (1 hour) - At the end, you'll have a complete NWC adjustment schedule with line-by-line justifications, supporting GL detail, and a presentation deck that frames adjustments as operational clarity rather than price reduction 🛠 Instructions Step 1: Request Detailed Balance Sheet Components in Week 1 Start your working capital analysis the moment diligence begins. Most sellers provide only high-level reported NWC in their CIM or data room. You need granular detail to identify adjustments. - Request 24 months of monthly balance sheets showing all current asset and current liability accounts separately (not just summary NWC figures) - Ask for detailed general ledger exports for the most recent month-end covering all accounts in current assets and current liabilities - Include this in your initial diligence request list so it doesn't look like an afterthought or signal that you're planning aggressive adjustments - Frame the request as standard operating procedure: "This helps us understand working capital requirements to ensure adequate financing and avoid post-close operational disruption" Watch for sellers who resist providing GL detail or only offer summary schedules. This often signals they know adjustments exist but hope you won't find them. Push for full transparency now rather than discovering issues late. Expected outcome: Complete GL-level visibility into every component of working capital, giving you the raw data to identify non-operational items and one-time events. Step 2: Calculate Historical NWC and Identify Outliers With detailed balance sheets in hand, build your working capital trend analysis. You're looking for both the baseline operating level and unusual items that distort it. - Create a monthly NWC schedule spanning###-###-#### months showing each current asset and liability account as separate line items - Calculate total NWC for each month and identify the average, but more importantly, look for accounts with unusual volatility or step-changes - Flag any account that shows a one-time spike or drop (customer deposit that cleared, delayed AP payment, unusual prepaid expense) - Separately track accounts that seem non-operational in nature (related party receivables, owner loans, prepaid personal expenses) - Calculate NWC as a percentage of revenue for each period to spot efficiency improvements or deterioration masked by revenue growth This analysis serves two purposes. First, it helps you understand true operating requirements. Second, it creates the foundation for your adjustment case by showing what's normal versus abnormal. The key insight here: Reported NWC at any single point in time almost never represents steady-state operating requirements. You need the trend to separate signal from noise. Expected outcome: A working capital trend schedule that clearly shows baseline operating levels and highlights 5-15 accounts warranting deeper investigation. Step 3: Conduct GL Deep-Dive for Flagged Accounts Now dive into the general ledger for every account that showed unusual activity or seems potentially non-operational. This is where you find the actual adjustments. - For each flagged account, pull the detailed GL showing every transaction for the most recent 3-6 months - Look for specific red flags: related party transactions, personal expenses, one-time events (equipment purchases coded to prepaid), non-recurring items (legal settlements, restructuring costs) - Cross-reference unusual entries against management discussion and other diligence findings (did they mention a systems conversion that created temporary AP buildup?) - Categorize findings into clear buckets: non-operational items, one-time events, debt-like items, and normalizations required for steady-state operations - Document every potential adjustment with specific GL transaction references, dates, amounts, and clear explanation of why it requires adjustment This is tedious work but absolutely critical. You need transaction-level proof because sellers will challenge every adjustment. Vague assertions fail. Specific GL references win. Pro tip: Schedule a working capital deep-dive call with the CFO to walk through your findings collaboratively before building your formal adjustment case. This often surfaces valid explanations that save you from weak adjustment positions. Expected outcome: A documented list of 8-20 potential adjustments with specific GL support, categorized by adjustment type, ready for validation and negotiation. Step 4: Build Your Adjustment Case with Ironclad Justification Transform your findings into a defensible adjustment schedule. Every adjustment needs clear rationale tied to the transaction structure and operational reality. - Create an adjustment schedule showing: Account name, Reported Amount, Adjustment Amount, Adjusted Amount, and detailed Justification - For non-operational items: Show GL proof that the item isn't required for operations (CEO loan receivable, personal vehicle prepaid insurance) - For one-time items: Demonstrate this is abnormal versus historical baseline and won't recur post-close (legal settlement accrual, customer deposit from project already delivered) - For debt-like items: Explain why the item should be treated as debt rather than working capital (deferred revenue that isn't a true operating liability, sales tax collected but not yet remitted) - For each adjustment, include the calculation methodology you'll use in the purchase agreement: "Prepaid Property Taxes will be excluded from NWC and settled at close via proration" The justification is everything. Frame adjustments around operational clarity and transaction mechanics, not price reduction. Use language like "ensuring accurate reflection of operating requirements" rather than "removing non-operational items to reduce purchase price." This matters because the seller's advisor will review your adjustment case looking for weak justifications they can attack. Every adjustment without airtight logic becomes a negotiation point that drags out the deal. Expected outcome: A complete adjustment schedule showing $500K-$2M+ in total adjustments, each with specific GL references and clear operational justification that will survive advisor scrutiny. Step 5: Present Adjustments Early and Collaboratively Timing and framing determine whether adjustments create productive discussion or deal-killing conflict. Present your findings during the middle of diligence, not at the end. - Schedule a working capital review call###-###-#### days into diligence, well before purchase agreement negotiation begins - Frame the conversation as "ensuring we have a shared understanding of operating requirements and transaction mechanics" not "here are all the problems we found" - Walk through your adjustment schedule line by line, sharing GL support and asking for management input on each item - Separate adjustments into three tiers: clear-cut non-operational items (these are non-negotiable), one-time items requiring discussion (open to validation), and potential adjustments you're flagging but want feedback on (build collaboration) - Document agreements on each adjustment in writing immediately after the call so there's no dispute later about what was discussed - For contentious items, offer to split the difference or phase the adjustment: "We could use a 6-month average instead of 12-month to meet in the middle" The goal is to lock in 70-80% of adjustments through collaborative discussion before purchase agreement drafting. This way, when your attorney includes detailed NWC definitions in the PA, the seller has already agreed to the methodology. Watch for sellers who refuse to engage substantively on adjustments during this phase. This often signals they're hoping to fight it out during PA negotiation when you have more sunk costs. Be prepared to walk if they won't discuss adjustments transparently. Expected outcome: Written confirmation of agreed-upon adjustments covering 70-80% of your total adjustment amount, incorporated into purchase agreement NWC definitions without fight. ⚡Methods & Tools Use this NWC Adjustment Documentation Template to build your case. This format organizes findings in a way that survives seller advisor scrutiny while maintaining collaborative tone. `NET WORKING CAPITAL DILIGENCE ADJUSTMENTS Target: [Company Name] As of: [Balance Sheet Date] Prepared by: [Your Firm] ADJUSTMENT SUMMARY Reported NWC (per management): $X,XXX,XXX Total Diligence Adjustments: ($XXX,XXX) Adjusted NWC (normalized): $X,XXX,XXX ADJUSTMENT DETAIL 1. CASH NORMALIZATION Reported Balance: $1,899,200 Adjustment: ($1,899,200) Adjusted Balance: $0 Justification: Per transaction structure, cash is excluded from NWC calculation and will be swept to seller at close. This is definitional per LOI terms. GL Reference: Account 1000, all cash accounts as of [date] 2. PREPAID PROPERTY TAXES Reported Balance: $35,600 Adjustment: ($35,600) Adjusted Balance: $0 Justification: Property taxes are paid by Buildings LLC (separate entity owned by seller) per lease agreement dated [date]. This prepaid balance represents payment made by company for landlord's obligation. Expense should not be borne by buyer. Will be settled via proration at close. GL Reference: Account 1450, transaction dated [date], $35,600 payment to [county] for annual property taxes. See also lease agreement Section 4.3 (taxes paid by landlord). 3. RELATED PARTY RECEIVABLE Reported Balance: $127,000 Adjustment: ($127,000) Adjusted Balance: $0 Justification: Receivable from CEO for personal expenses charged to company credit card. This is non-operational and will be settled prior to close per management confirmation on [date] call. GL Reference: Account 1250, Due from Officers, balance built up over 18 months from transactions coded as "Owner Draw" in GL detail. 4. DEFERRED REVENUE NORMALIZATION Reported Balance: $156,600 Adjustment: ($156,600) Adjusted Balance: $0 Justification: Balance consists of customer deposits on completed projects that were delivered prior to balance sheet date but not yet invoiced due to billing cycle timing. This is not a true operating liability representing future obligations. Revenue was recognized in prior period; liability should be reversed. GL Reference: Account 2400, analysis of subsidiary ledger shows $156K relates to Project IDs [list] all marked "Complete" in project management system with delivery dates in [month]. CALCULATION METHODOLOGY FOR PA Normalized NWC will be calculated using the same methodology applied above: - Current Assets (excluding cash, non-operational receivables, and prepaid property taxes) - Less: Current Liabilities (excluding income tax payable, deferred revenue from completed projects, and quarterly profit sharing accruals) - Equals: Normalized NWC Target NWC Peg: [12-month average of normalized NWC] Working Capital True-Up: Actual NWC at close will be calculated per methodology above, with purchase price adjusted dollar-for-dollar for any variance from peg.` 💡 Pro Tips - Start the NWC discussion in your first management meeting by asking "Walk me through items in working capital that might not be operational or might be one-time in nature" to signal this is standard diligence, not adversarial discovery. - Create a "parking lot" document for questionable items where you're genuinely unsure if adjustment is warranted, share it with the seller, and ask for their input; this collaborative approach often gets you 80% of what you want without fight. - Time your adjustment presentation for mid-diligence when you've built rapport but before purchase agreement drafting begins; presenting during PA negotiation looks like retrading even when adjustments are legitimate. - Use the seller's own historical data against them by showing "your NWC averaged $1.2M over the past 18 months, but it's $2.8M today due to these one-time items; we just want to get back to your normal operating level." - Offer to exclude small adjustments (under $25K) from your formal case even if they're legitimate; this builds goodwill and signals you're focused on material items, not nickel-and-diming them. ⚠️ Pitfalls - Presenting a $2M adjustment list in week 10 of a 12-week diligence process with no prior discussion looks like aggressive retrading and often kills the deal even when adjustments are 100% valid. - Using accusatory language like "we found these problems" or "these items don't belong" triggers seller defensiveness; frame everything as "ensuring we have a shared understanding of operating requirements." - Failing to provide GL-level transaction support for each adjustment gives the seller's advisor ammunition to dismiss your entire case as speculative or unsupported. - Insisting on adjustments that are technically correct but immaterial (under 2% of total NWC) wastes negotiating capital and makes you look petty; focus only on items that actually move the purchase price. - Agreeing to "discuss NWC during purchase agreement review" without documenting methodology in writing first guarantees a 4-week delay while attorneys fight over calculation details you could have resolved in one call.