The Working Capital "PEG": Why Your $5M Exit Might Close for Less
You negotiate a sale price of $5 Million. The Letter of Intent (LOI) states the deal is "Cash-Free, Debt-Free." Naturally, you assume this means: "The buyer pays off my debt, I keep all the cash in the bank, and I walk away with a $5 Million check."
You are likely wrong.
If you attempt to strip every dime of operating capital out of the company on closing day, you will be hit with a massive Purchase Price Reduction. This friction is caused by the Net Working Capital (NWC) PEG. It is the most confusing mechanism in M&A, and failing to understand it can cost you six figures at the closing table.
1. The Definition: "Cash-Free" $\neq$ "Capital-Free"
While the deal is "Cash-Free" (meaning you keep excess cash), the business must remain a "going concern" the moment the keys are handed over.
The Buyer’s Perspective: "I am buying a functioning car. I expect there to be enough gas in the tank to get me home."
The Reality: If you sweep all the cash and collect every penny of Accounts Receivable (AR) before closing, the buyer will have $0 to pay your caregivers next Friday. They will not fund your final weeks of operations out of their own pocket.
Therefore, the deal requires you to leave a "Target" amount of liquidity in the business. This Target is called the PEG.
The Home Care & Hospice NWC Formula
In our vertical, the math typically looks like this:
$$NWC = (\text{Accounts Receivable} + \text{Prepaid Expenses} + \text{Inventory}) - (\text{Accounts Payable} + \text{Accrued Payroll} + \text{Accrued PTO})$$
2. The Mechanism: How the PEG is Calculated
The PEG isn't a random number; it’s a reflection of your historical operational requirements. During Due Diligence, the buyer calculates your Average Net Working Capital over the last 12 months (or a "Normalized" period).
The "True-Up" Calculation
At closing (and finalized 60–90 days post-close), we compare your Actual Working Capital on the balance sheet vs. the PEG.
ScenarioWhat HappenedThe Financial ResultA (Surplus)You leave $350k in NWC against a $300k PEG.The Buyer pays you an extra $50,000.B (Deficiency)You leave $200k in NWC against a $300k PEG.The Buyer deducts $100,000 from your check.
3. The Trap: The "Aggressive Collection" Mistake
This is where unsophisticated sellers get hurt. As the closing date approaches, a seller might panic and think: "I need to collect every invoice NOW so I can put the cash in my personal account!"
By aggressively collecting AR, you drain your asset base. However, the PEG was set based on your 12-month average when AR was "normal."
The Illusion: You have more cash in your personal bank account today.
The Reality: The Purchase Price drops dollar-for-dollar. You gain nothing net, but you create massive friction with the buyer and potentially violate the "ordinary course of business" clause in your purchase agreement.
4. Advanced Strategy: Negotiating the PEG
This is where the right advisor earns their fee. The PEG is not a static fact; it is a point of negotiation.
Define "Current": We fight to exclude non-operating liabilities (like owner distributions labeled as payables) that artificially inflate the PEG.
Normalize the Average: If a Medicaid audit once froze your payments for 60 days, that month shouldn't be part of your average. We "normalize" the lookback period to reflect a healthy business.
Time the Close: In home care, payroll is your largest liability. We strategically time the closing date to align with your payroll cycles when you sell your home care business, ensuring the "Accrued Payroll" liability on the closing balance sheet is as favorable to you as possible. Integrating these structural protections is a primary focus for any professional home care business broker.
Don’t Let the Math Surprise You
The NWC PEG ensures fair play, but it feels like a penalty to the unprepared. At Home Care Business Broker, we model your PEG before we ever sign an LOI. We negotiate the definition of "Working Capital" aggressively to ensure that more of the final sale price stays in your pocket.
Do you know your Working Capital number?