Oct 08, 2026 by Offer

Working capital adjustments in M&A: Answer Guide 2027

For a working capital M&A interview question, lead with this: deals are priced on a cash-free, debt-free basis assuming a "normal" level of working capital, called the peg. At closing, actual working capital is compared to the peg — if it is higher, the buyer pays more; if lower, the purchase price is reduced. The adjustment protects the buyer from overpaying for a business stripped of its operating liquidity.

What This Tests

This question tests whether you understand how headline deal value translates into actual cash changing hands. Interviewers use it to separate candidates who memorized "enterprise value" from those who understand closing mechanics: pegs, true-ups, escrows, and why sellers cannot just drain receivables before close. It is commonly reported by candidates as a follow-up to enterprise value questions.

How to Answer a Working Capital M&A Interview Question

1. Start with the cash-free, debt-free concept. The buyer pays for the business assuming it comes with a normal amount of working capital — enough inventory, receivables, and payables to operate. Cash and debt are handled separately, so working capital is the remaining moving piece.

2. Explain the peg. Buyer and seller negotiate a target working capital level, usually based on historical averages. This peg is written into the purchase agreement.

3. Explain the true-up mechanism. After closing, actual working capital is measured (often 60–90 days post-close, though timelines may vary by role and region). If actual exceeds the peg, the buyer pays the seller the difference; if it falls short, the seller refunds the buyer. Part of the price is typically held in escrow to fund this.

4. Close with a sample line. "Working capital adjustments compare actual working capital at close to a negotiated peg. Surplus goes to the seller, shortfall comes back to the buyer — it stops the seller from draining the business before handing over the keys."

Common Mistakes on Working Capital M&A Interview Questions

Forgetting the definition of working capital. It is current assets minus current liabilities (excluding cash and debt in this context). Stumbling on the basic definition undermines everything after it.

Not explaining why the peg exists. The mechanism is pointless without the rationale: without it, a seller could collect all receivables and delay payables before close, pocketing cash the buyer already paid for.

Ignoring the escrow. Candidates commonly report follow-ups about how the adjustment is funded — know that a portion of consideration is typically held back in escrow for the true-up.

Closing mechanics are exactly the kind of detail that separates hires from rejections in technical rounds. If you can walk through pegs and true-ups cleanly, you signal real deal literacy.

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FAQ

What is a working capital peg in M&A? It is the agreed "normal" level of working capital the target is expected to deliver at closing, usually set from historical averages and written into the purchase agreement.

Why do M&A deals adjust for working capital? To keep the seller from extracting value just before close — for example by collecting receivables aggressively or stretching payables — which would leave the buyer with an underfunded business.

What counts as working capital in the adjustment? Operating current assets and liabilities: receivables, inventory, payables, and accruals. Cash, debt, and debt-like items are excluded and handled separately.

When is the working capital adjustment calculated? After closing, once final financials are available — commonly within a couple of months, though the exact window is negotiated and may vary by role and region.

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