Picture the day you sign the purchase agreement. The price is set. The number you fought for through months of back and forth is finally in writing, and it feels like the hard part is behind you.
Then, weeks after close, you get a call. Or worse, an email with a spreadsheet attached. The final number is lower than what you signed for, and the buyer is pointing to a clause you remember reading but never fully understood. Nobody misled you. You agreed to it. You just did not know what you were agreeing to at the time, and now it is too late to renegotiate.
That gap between the price you thought you sold for and the number that actually hits your account has a name. It is called working capital, and it is one of the most consistently misunderstood pieces of any deal.
What Working Capital Actually Means Here
Forget the textbook definition for a second. In a sale, working capital is a promise. It is the agreed-upon amount of current assets minus current liabilities that your business is expected to have on hand the day the deal closes, essentially proof that you are handing over a business that can keep operating without a cash infusion, and without you, the next morning, which is the same underlying concern buyers have when they price in owner reliance.
That agreed amount is called the peg. If you show up at close above the peg, you are typically owed more. If you come in below it, the purchase price gets adjusted down, dollar for dollar. Most sellers do not know this mechanism exists until they are already inside a deal and someone hands them a target number to react to.
The Peg Gets Set Early. The Bill Comes Late.
Here is what makes this mechanic so dangerous. The peg conversation happens early, usually during the letter of intent or the opening weeks of diligence, long before most sellers are thinking in these terms. There is a price on the table, momentum is building, and a target working capital number gets dropped into the document almost as a formality.
Sellers often agree to it without fully understanding what it means for their outcome, because at that stage the focus is entirely on the headline price. By the time the post-close adjustment is actually calculated, weeks or months later, the deal is done and the number is final. There is no reopening that conversation. Buyers know this. It is part of why the process rewards sellers who show up prepared before the first term sheet, not after.
Your Slow Season Can Set the Peg
HVAC and mechanical contracting businesses do not run flat all year. Summer brings a wave of receivables and active jobs. Winter slows down, cash tightens, and the balance sheet looks different in January than it does in July.
If the timing of close does not account for that cycle, you can end up delivering the business at the low point of your own seasonal pattern with no adjustment made for it. A peg that was set using summer numbers, or an average that never accounted for the swing, can leave a seller on the wrong side of a very large number simply because of when the deal happened to close. This is exactly the kind of detail that gets missed when an owner is reacting to an inbound offer instead of running a real process.
What Counts, and What Quietly Does Not
Working capital sounds simple until you look at what actually goes into the calculation. Cash is typically excluded entirely, which surprises owners who assumed every dollar in the bank was theirs to keep on top of the price.
AR aging cutoffs matter more than most sellers expect. A receivable sitting past a certain number of days may get excluded from the calculation even though you consider it fully collectible. Accrued liabilities, deferred revenue, and unbilled work all get scrutinized closely, and buyers have entire teams whose job is to find the version of these numbers that favors them. Sellers who have not modeled this before the letter of intent are negotiating blind, agreeing to terms they cannot fully evaluate because they have never seen how the math actually plays out once real due diligence begins.
The Move That Changes the Outcome
None of this is complicated once someone explains it in plain language. The problem is that it almost never gets explained until it already matters, and by then the leverage to negotiate it has mostly moved to the other side of the table.
Owners who understand working capital mechanics before a letter of intent ever arrives are in a completely different position. They can negotiate the peg itself, structure the measurement period around their actual seasonality, and walk into diligence with a clear sense of what they are being held to. It is one more reason preparation inside a real 3 to 5 year exit roadmap pays off long before a term sheet shows up, and it is exactly the kind of detail that determines whether a buyer walks away still liking the business or ends up in the category of what buyers actually mean when they raise concerns nobody prepared you for.
This is the conversation we have with owners well before the market ever sees their business. Understanding the number that moves at closing, before it moves, is what separates a clean exit from a surprise.