Which number is the target and which is the delivered balance?
The peg is the agreed target. Closing working capital is the measured amount under the deal's definition. The formula compares them according to the documents. Keep all three inputs visible. A recorded balance-sheet figure should not silently become the negotiated target or decide the price adjustment.
First define working capital for this agreement. Find the included assets and liabilities, their values, and the accounting rules. These operating balances may differ from a financial-statement subtotal. Read the definition before discussing either the target or delivered amount. A familiar label is not enough.
The valuation hub connects the term with transaction review. The peg negotiation guide develops target and proceeds analysis. Here, use the card to identify the agreed inputs and process.
Ask the parties to identify the definition, target, formula, schedules, and sample statement. The phrase normal working capital does not supply these terms. An LOI may leave details open for later agreement. Mark those gaps so a proposed target does not appear to be a fully settled process.
What belongs on the adjustment identity card?
Map accounts to the actual agreement. Label each included, excluded, or given special treatment. Check cash, debt, taxes, deposits, retainage, inventory, and reserves separately. Their account names do not decide the result. Keep the mapping with the calculation so another reviewer can reproduce the measure.
Record valuation and cutoff rules. Ledger balances may need changes under the agreed policies. A list of accounts alone is incomplete. State how each balance is measured and which date applies. Otherwise two readers can use the same records but reach different amounts without explaining why.
This original card helps identify the agreement's inputs:
| Card field | Document or evidence to locate | Question to resolve |
|---|---|---|
| Included accounts | Definition and account schedule | Which operating balances enter the measure? |
| Excluded accounts | Express exclusions and related price bridge | Where are omitted items treated? |
| Valuation policy | Reserves, inventory, credits, and other rules | How is each included balance measured? |
| Target or peg | Agreed amount and stated basis | What delivery level is being compared? |
| Closing amount | Cutoff and supporting balances | What was delivered under the definition? |
| Formula | Adjustment terms and example | What direction and limits apply? |
| Process | Estimate, final statement, review, dispute terms | Who calculates what and when? |
| Funding | Complete sources and uses review | How does the structure fit the financing? |
Keep a bridge from ledger accounts to the contract measure. Show the recorded amount, defined treatment, adjustment, and included balance. This lets reviewers reproduce the result. It also helps separate a disagreement about which account belongs from a simple arithmetic error.
What does a historical agreement example establish?
A submitted NextEra draft asset purchase agreement dated February 6, 2020 separately addresses target net working capital, closing statements, accounting principles, and a scoped dispute mechanism. It is a proposed utility transaction document published with South Carolina legislative materials.
This is a proposed utility deal, not an executed plumbing transaction or universal convention. Do not copy its terms as though they govern a local contractor's sale. Its limited use here is to show that the target, measurement rules, and dispute process need negotiated definitions.
How can a symbolic formula clarify the assumptions?
Let W be measured closing working capital under the agreed definition. Let T be the target. For a hypothetical simple symmetric formula, the adjustment is W − T. These symbols show how one assumed formula works. The actual agreement must supply the governing rule for the transaction.
Under that assumed formula, W above T gives a positive adjustment. W below T gives a negative one. Equal amounts give zero. These directions depend on the stated formula. The agreement may contain conditions, limits, or bands, so check those terms before using the symbolic result.
Define the included measure too. A hypothetical contract could set W as included receivables plus included inventory less included payables. Each component still needs valuation, reserve, and cutoff policies. The symbols explain the arithmetic but do not establish which balances a real contract includes.
This worked example sets no dollar target, month-count rule, or reserve percentage. Actual target selection, seasonality, and negotiated economics need professional review of the company's records and agreement.
How do accounting basis and measurement process affect the result?
The IRS's Publication 538 explains tax accounting periods and methods. Cash and accrual timing can change recorded receipts and costs. A tax method does not itself establish the deal's working capital definition or target. Match the records to the negotiated policies separately.
Find who prepares the closing estimate and final measurement. Read review rights, documentation, deadlines, and dispute terms. A final amount can differ from the estimate without proving misconduct. The agreed process should show how the parties check the difference and resolve an objection within the governing terms.
Separate math questions from contract interpretation with advisers. A named accountant may have a limited scope. Do not assume that person decides every dispute. Locate the actual authority and process so a calculation review does not silently become a broader ruling on the agreement.
The quality of earnings guide develops wider records testing. That review can support the file, but does not supply the negotiated closing balance definition. Keep the scope clear. A supported earnings adjustment is not automatically the agreed treatment of a balance at closing.
How does the peg differ from other transaction terms?
An add-back changes a stated earnings measure. A working capital adjustment measures closing balances under the contract. Both may use related records. Explain each treatment so a single issue does not become an unexplained addition or deduction in two parts of the transaction model.
An earnout depends on agreed future results or milestones. The peg comparison uses the closing measurement and governing formula. A calculation paid later is not automatically an earnout. Read what triggers payment rather than classifying the term solely by the date cash changes hands.
An indemnity escrow supports specified claims. An adjustment escrow may serve another purpose. Identify the fund and process that apply. Do not put all held consideration into one category merely because the funds sit with an escrow agent or are released after closing.
Keep cash and debt treatment consistent across the price bridge. If an item is excluded from working capital and handled elsewhere, show where. The reconciliation should prevent accidental omission or double counting. An exclusion from one measure does not necessarily mean an amount disappears from the whole deal.
The peg is also different from the buyer's cash reserve. Payroll, collections, capital needs, and financing affect that operating plan. An agreed target does not prove every future cash need is funded. Use the actual records and payment timing when assessing the proposed business after closing.
What financing review belongs alongside the card?
The current SBA SOP 50 10 8.1 technical updates, effective October 1, 2026, contain ownership-change categories, project-cost, and repayment requirements for relevant financing. They do not make every negotiated true-up automatically eligible or funded.
Give the lender the complete consideration and sources-and-uses structure. Show how closing estimates and final adjustments may change funding. Ask it to review the actual terms. Keep its conclusions separate from the parties' proposed formula so the agreement does not imply automatic financing eligibility.
Use this identity sequence:
- Locate included and excluded balances and their valuation policies.
- Identify the agreed target separately from the measured closing amount.
- Read the actual formula, limits, and example calculation.
- Reconcile source records, cutoff, accounting basis, and contract treatment.
- Locate estimate, final statement, review, and dispute provisions.
- Confirm the complete financing structure and unresolved funding questions.
How do sellers use the peg, and which mistakes matter?
A seller can prepare the glossary definition and card with the account bridge and proposed target. A buyer tests delivered balances. A lender reviews funding. Keep estimates, final measurements, and each party's conclusions distinct.
Common mistakes include substituting a tax subtotal or assuming a dollar-for-dollar shortfall adjustment. Read the formula and process. Check cash, debt, deposits, and reserves across the complete price bridge.