This guide explains how the peg is set, where purchase price leaks out of the mechanism, what current deal data shows about size and frequency, and which drafting choices decide who wins an argument. Written for owners of lower middle market businesses who have received an LOI or expect one soon.
Key takeaways
- Purchase price adjustments appear in more than 90% of private target deals today, up from about 50% fifteen years ago (SRS Acquiom, 2026 studies).
- The peg is conventionally a trailing twelve month average of normalized working capital, adjusted for seasonality. No survey publishes the actual distribution of lookback periods used.
- Median separate PPA escrow ran about 1% of transaction value, matching buyers' median initial claim size of 0.9% (SRS Acquiom 2025 Working Capital PPA Study).
- Adjustment escrows are proportionally larger on smaller deals, and some have reached 14% (Goodwin Deals Database, 2024).
- Debt-like items are a negotiated definition, not a standard one. Deferred revenue and customer deposits are the two that most often surprise sellers.
- Whether your closing statement says "GAAP" or "consistent with past practice" decides who wins a dispute. Delaware has ruled both ways.
How the mechanism works
The adjustment exists because the price you negotiate is based on a balance sheet from a date in the past, while the business you deliver has a balance sheet on the closing date. The mechanism trues up the difference.
The structure is nearly universal. Both sides agree a target level of net working capital, called the peg. At closing, the seller delivers an estimate and the price is provisionally adjusted against the peg. Within a set window, the buyer prepares a final closing statement, and the difference from the estimate settles dollar for dollar.
Two features are worth knowing before you negotiate. In the deals studied in the American Bar Association's guide to purchase price adjustments, the buyer prepared the closing statement in 94% of two-step processes, and in 94% of those the buyer had no express obligation to obtain seller approval of the estimated figure. Seller objection windows typically run 30 to 60 days. Those figures come from 2021-vintage ABA and SRS studies and should be read as convention rather than current measurement.
The other feature is that collars are rare. In the same studies, 90% of ABA transactions and 87% of SRS transactions had no cap or floor on the adjustment. A simple dollar-for-dollar, unlimited adjustment is the market default, which means there is no structural limit on how much price the mechanism can take back.
Locked box: the European alternative
A locked box fixes the price on a historical balance sheet date and gives the buyer contractual protection against value leaving the business between then and closing. There is no post-closing true-up at all.
It is standard in European deals and rare in the US. DLA Piper, writing from a base of over 1,000 private transactions, described locked box as common in European M&A and gaining ground worldwide with the exception of the US. Potomac Law called it still surprisingly rare in US-to-US deals as recently as December 2024. The best quantified US figure is a Grant Thornton survey of roughly 200 US M&A professionals covering 1,300 deals, in which only 30% had used a locked box mechanism, and where using one ranked as the top response for reducing post-closing disputes. That survey is roughly 2021 vintage.
If you are a European seller talking to a US buyer, expect completion accounts and a peg. If you are selling a European business, locked box may be on the table, and it removes an entire category of post-closing risk. The cross-border dynamics matter more here than most sellers expect.
Do you know what your enterprise value looks like before adjustments? The valuation calculator gives you the starting point every purchase price mechanism works back from.
Get StartedHow the peg gets set
The peg is conventionally a trailing twelve month average of normalized net working capital, adjusted for seasonality. Every practitioner source describes it this way, and none of them publishes data on what lookback periods deals actually use, so treat this as convention rather than a measured market standard.
BDO describes the peg as typically an average of normalized adjusted net working capital over the latest trailing twelve months, while noting the period may be shorter, six or even three months, where that better represents the current state. Kreischer Miller reports that most parties use a trailing twelve or eighteen month average to smooth monthly fluctuation, and explicitly warns that a straight average misleads where a business peaks in a single month.
The ABA guide adds the point that most sellers miss: the peg period should match the earnings period the price was built on. If the buyer priced off trailing twelve month EBITDA, a trailing twelve month working capital average is consistent. If the buyer priced off a forecast, the peg should reflect forecast working capital over the same horizon, otherwise you are being paid on one basis and charged on another.
Three questions to answer before you agree a peg
Ask when the closing is likely to fall relative to your seasonal cycle. A twelve month average applied at a seasonal trough produces a structural shortfall that has nothing to do with how you ran the business.
Ask what "normalized" excludes. Non-recurring receivables, one-off inventory builds, and any item you and the buyer treat as debt need to come out of both the peg and the closing calculation, consistently.
Ask whether your interim months are comparable to year end. BDO flags this specifically: significant year-end true-ups mean interim balances are not representative, and in smaller deals cash-basis records need recalculating on an accrual basis before any of this is meaningful.
Where purchase price actually leaks
Four mechanisms account for most of the value that moves after signing. None of them is exotic, and all of them are negotiable at the LOI stage rather than at the closing statement stage.
Debt-like items
Cash-free debt-free sounds standard. It is not. Orrick describes the definition of debt-like items as having variability in it and being a highly negotiated term.
Moore Colson's list of what buyers commonly push into debt is the most complete public version: aged accounts payable, accrued bonuses and commissions, earned but unpaid PTO, accrued severance, customer deposits and deferred revenue, accrued legal settlements, and earn-out obligations from a prior acquisition. The reasoning on deferred revenue is the one to understand, because it is logically sound and expensive: the seller keeps the cash while the buyer bears the cost of delivering the product or service.
The timing point matters as much as the list. Moore Colson notes that these items are rarely identified in the LOI and are typically surfaced during post-LOI diligence, when the seller's leverage is lowest. Naming them in the LOI is one of the highest-return five minutes in a sale process.
Accounts receivable reserves
Buyers frequently request a reserve against receivables in the closing calculation even where GAAP and the seller's own historical policy do not require one. SRS Acquiom describes the consequence directly: this can create a windfall for the buyer as those receivables are subsequently collected.
The ABA guide gives the standard fix. Provide in the agreement that any receivable not collected within a defined period, ninety days is common, is deducted, which converts an estimate into a measurement.
Cut-off on unbilled work
The ABA guide flags disputes over cut-off principles for services performed or products shipped but not yet billed. For project-based and services businesses this is often the largest single line in the argument, and it is worth defining the recognition point explicitly in a schedule.
The accounting standard itself
This is the one that decides disputes, and Delaware has ruled in both directions depending on the wording.
| Case | Contract wording | Outcome |
|---|---|---|
| Alliant Techsystems v. MidOcean Bushnell (Del. Ch. 2015) | GAAP and consistent with past practice | Both prongs independent, buyer won, past practice did not rescue a non-GAAP calculation |
| Chicago Bridge & Iron v. Westinghouse (Del. 2017) | Only consistency with past practice | Buyer's GAAP-based adjustment blocked |
| Golden Rule Financial v. SRS (Del. 2021) | Specific standard referenced (ASC 606) vs general "consistently applied" | Specific reference prevailed, seller won |
Worked example: how a peg costs $370,000
The following example is illustrative. It shows a seasonality error and a debt-like item reclassification on a mid-sized lower middle market deal.
| Step | Item | Amount |
|---|---|---|
| 1 | Enterprise value agreed at LOI, cash-free debt-free | $9,000,000 |
| 2 | Peg set as trailing twelve month average net working capital | $1,450,000 |
| 3 | Actual net working capital at closing, which falls in the seasonal trough | $1,290,000 |
| 4 | Shortfall against the peg, adjusted dollar for dollar | ($160,000) |
| 5 | Deferred revenue reclassified by the buyer as a debt-like item | ($210,000) |
| 6 | Net proceeds after both adjustments | $8,630,000 |
| 7 | Total reduction as a share of enterprise value | 4.1% |
| 8 | Peg had it been set on the same calendar month in the prior two years | $1,300,000 |
| 9 | Shortfall under a seasonality-adjusted peg | ($0) |
The takeaway: the seasonality error alone costs $160,000, and it is entirely avoidable by matching the peg period to the likely closing month rather than defaulting to a twelve month average. The deferred revenue reclassification costs a further $210,000 and is avoidable only by defining debt-like items in the LOI, before the buyer's accountants have a view. Together they move 4.1% of enterprise value, which on this deal exceeds the entire cost of the sell-side quality of earnings work that would have surfaced both issues in advance.
What the deal data shows
The two authoritative sources are SRS Acquiom and the ABA. Both flagship studies are gated, so the figures below come from law firm summaries, with editions named so you can date them.
Prevalence. SRS Acquiom's 2026 Working Capital PPA Study, drawing on more than 1,500 private target acquisitions worth over $385B, reports that working capital purchase price adjustments are present in more than 90% of transactions today, up from 50% a decade ago. The ABA's 2025 Private Target M&A Deal Points Study, published December 2025 and covering 139 agreements from calendar 2024 and Q1 2025, puts prevalence at 90%, down slightly from 92%.
Claim size and outcomes. From the SRS Acquiom 2025 study, reported by DealLawyers.com: the median separate PPA escrow rose to about 1% of transaction value, tracking the average size of buyers' initial PPA claims at 0.9%, though 24% of claims exceeded 1% of transaction value. Buyers' proposed calculations were reviewed and ultimately accepted in seven out of ten cases, and even contested claims took under two months to resolve on a median basis.
Escrow structure is tightening. The ABA 2025 study found separate PPA escrows in 58% of deals, up from 53% and the highest since the metric was first tracked in 2006. More significantly for sellers, 42% of those specify the adjustment escrow as the sole source of recovery for the adjustment, up steadily from 11% in 2017. That cap is a meaningful protection and is worth asking for.
Size matters, and not in your favor. Goodwin's Deals Database found that median adjustment escrows run below 1% on larger deals but above 1% on smaller ones, with far higher variability and some reaching as high as 14%. Their framing is the one lower middle market sellers should internalize: in lower-value deals, even a small adjustment to the net working capital target represents a larger percentage of the purchase price.
Methodology is shifting. SRS Acquiom's 2026 M&A Deal Terms Study, covering 2,300 deals worth $569B closed between 2020 and 2025, reports that the worksheet approach, a specific agreed calculation scheduled to the purchase agreement, reached 39% of deals, its highest ever, while "GAAP consistently applied" fell to 32%, its lowest ever. That is the market moving toward exactly the drafting discipline the Delaware cases reward.
Disputes are common. Grant Thornton's survey of roughly 200 US M&A professionals across 1,300 deals found that approximately half of deals ended in some form of accounting dispute, with 51% citing earn-out disputes and 46% working capital. Purchase price adjustment disputes were more common than breaches of representations and warranties. That survey is roughly 2021 vintage and should be dated as such.
What this means for your negotiation
Three moves change the economics, and all of them happen before the LOI is signed.
Define debt-like items in the LOI by name. Deferred revenue, customer deposits, accrued PTO, and accrued bonuses are the four to list explicitly. Leaving the definition to post-LOI diligence hands the buyer a negotiation you cannot win under exclusivity.
Set the peg on the right period. If your closing will land in a seasonal trough, say so and negotiate a same-month or seasonally weighted peg. This is a technical point that costs nothing to raise early and is nearly impossible to fix later.
Ask for the adjustment escrow to be the sole source of recovery for the adjustment, and ask for a cap. Both exist in the market: 42% of deals with a separate PPA escrow already make it the exclusive remedy, and while collars are uncommon, they are not unheard of.
The adjustment sits alongside the indemnification package as one of the two contractual mechanisms that determine how much of the headline price you keep. Both are negotiated in the same weeks, both are easier to shape with a competing bidder in the room, and both benefit from the preparation described in exit planning.
If the LOI stage itself is new to you, the letter of intent guide covers what else belongs in that document, and the broader process of selling a business sets the context. To size what a 4% swing actually means for you, start from the valuation calculator or the business valuation hub, and check the multiple your industry commands before you agree a peg.
Reviewing an LOI with a working capital peg in it? Book a confidential consultation to work through the peg period, debt-like items and escrow terms before they harden.
Get StartedThis article is for general information and does not replace individual advice from a qualified attorney, CPA or tax advisor.
About the author: Lud Schroedl is the founder of FISART. An operator who built and sold his own companies, he understands the sale process from the owner's side of the table.
Published on 17 August 2026. Last updated on 17 August 2026.