Net Working Capital Peg in Due Diligence, Explained

Working capital · Abhishek Bhandari · 2 September 2026

Why the working capital peg moves price as much as EBITDA, what diligence teams analyse (monthly NWC, seasonality, DSO/DIO/DPO) and how to build the schedule.

Buyers and sellers argue about EBITDA in public and about working capital in private. The net working capital (NWC) peg, the level of working capital the buyer expects to receive at completion, is a pound-for-pound price adjustment. Set it too low and the seller extracts cash by stretching creditors before completion; set it too high and the buyer is overpaying for stock. This guide covers what a diligence team looks at and how the analysis should be built.

What counts as working capital

In a completion accounts or locked-box deal, NWC is defined in the SPA, and the definition is negotiated. The diligence team’s job is to show what the historical numbers look like under a sensible definition and to flag the items where the definition matters.

Typically included: trade receivables, inventory, trade payables, prepayments, accruals, other operating receivables and payables.

Typically excluded (and treated as cash, debt or debt-like): cash, borrowings, corporate tax, deferred tax, dividends payable, accrued interest, and often items like deferred revenue, customer deposits, bonus accruals and capex creditors, which are the subject of the real negotiation.

The schedule should split NWC into trade working capital (receivables, inventory, payables) and other, so each item can be moved between definitions without rebuilding.

Why monthly data is non-negotiable

Year-end balance sheets tell you almost nothing about working capital. Companies manage year-end; they do not manage every month-end. A monthly NWC schedule over 24 to 36 months shows:

• Seasonality. A retailer’s inventory peaks in October and troughs in January. A peg set at year-end (January) would understate the working capital the business needs for most of the year.
• Trend. Rising receivable days can mean growth, weaker customers, or stretched collection; each has a different implication.
• Window dressing. A sharp fall in payables at year-end followed by a rebound in month one suggests suppliers were paid early to flatter the balance sheet, or stretched then caught up.

If monthly balance sheets do not exist, the team asks for them. If they cannot be produced, that is itself a finding about the finance function.

The KPIs and what they show

• DSO (days sales outstanding) = receivables / revenue × days. Rising DSO with stable revenue is a collection problem; rising DSO with rising revenue may be a mix shift toward slower-paying customers.
• DIO (days inventory outstanding) = inventory / COGS × days. Rising DIO can mean obsolescence, overbuying ahead of a price increase, or a deliberate stock build before a sale process.
• DPO (days payables outstanding) = payables / COGS × days. A step up before a sale process is the classic cash extraction tactic.
• Cash conversion cycle = DSO + DIO − DPO. The number of days of working capital the business finances.

Compute these monthly using LTM revenue and COGS as the denominators, so a single strong month does not distort the ratio.

Setting the peg

The usual starting point is the LTM average of monthly NWC under the agreed definition, on the basis that it represents a normal level over a full seasonal cycle. Adjustments the diligence team will consider:

• Excluding abnormal months. A one-off large receivable or a stock build for a lost customer.
• Trend adjustment. If NWC has grown with revenue, a trailing average understates the level at completion; some deals use a forward-looking normalised level.
• Pro forma for changes. New payment terms with a major customer, a switch to consignment stock, a factoring arrangement ending.
• Reported max, min and swing. Shows how far a single month can deviate from the average and informs the buyer’s view of the risk in the completion mechanism.

The peg is a negotiation, not a calculation; the analysis gives each side a defensible number.

Items that get argued about

• Deferred revenue. Sellers say it is working capital (it will be earned); buyers say it is a debt-like obligation to deliver.
• Accrued bonuses. Usually debt-like if they relate to pre-completion performance.
• Capex creditors. Debt-like: they relate to investment, not operations.
• Customer deposits. Depends on whether they are refundable and how quickly they turn.
• Intercompany balances in a carve-out. Usually settled at completion and excluded.
• Provisions. Restructuring and legal provisions are debt-like; warranty provisions are often working capital.

Each of these should be a separate line in the schedule so it can be reclassified in a sentence.

Building the schedule

A working capital schedule that survives review has:

1. A row per balance sheet account, with its mapping code and classification (trade, other, excluded).
2. Monthly columns for the full period, with annual columns alongside.
3. Subtotals for trade working capital and reported NWC.
4. KPIs (DSO, DIO, DPO, CCC) computed on LTM denominators.
5. Reported max, min and swing per period.
6. A source check row: each month’s NWC recalculated from the balance sheet by mapping code, with a variance that reads zero.

ZAF Tools builds this schedule from the mapped trial balance, including the monthly detail, the KPIs and the source check, and drafts commentary on trends and seasonality beside it. See the working capital module.