Working capital is the difference between a business's current assets (cash, accounts receivable, inventory, prepaid expenses) and its current liabilities (accounts payable, accrued liabilities, deferred revenue, current portion of debt). In Canadian business acquisitions, the working capital peg is a critical and frequently contested deal mechanic. Most purchase agreements require the seller to deliver the business with a target working capital level — called the working capital peg or target — so the buyer has enough short-term liquidity to operate normally from day one without injecting additional cash. If actual working capital at closing is above the peg, the buyer pays the seller more; if below, the seller pays the buyer a price adjustment. Working capital disputes are the most common post-closing litigation trigger in Canadian SMB deals. Buyers must define working capital precisely in the LOI — what is included (cash? line of credit?), what the calculation period is, and what accounting standards apply. For seasonal businesses, the working capital peg should be set at normalized levels, not at the peak or trough of the season. Professional advice from a CPA is essential when negotiating the working capital provision.
A buyer acquires a Surrey catering company with a working capital peg of $120,000. At closing, an audit shows $95,000 in actual working capital — $25,000 below the peg. Under the purchase agreement, the seller must pay the buyer $25,000 as a price adjustment. Without the peg, the buyer would have effectively overpaid by that amount.
Ali Sedighi uses this concept on every valuation engagement — cross-checking seller claims against third-party financial data and Canadian comparable sales before advising any buyer on price.