The peg is one number in the purchase agreement, and on a seasonal business the choice of that number decides more of the price than the business does.
The usual peg is the average of the last twelve month-end balances of net working capital, and the completion adjustment is the balance actually delivered minus that peg, euro for euro. On an illustrative seasonal business the average is 19.68 million, and a June completion produces an adjustment of +4.47 million to the seller against +0.23 million under a peg matched to the same month. Across the year the average peg pays anything from −1.83 to +4.47 million: a 6.30 million spread decided by the calendar.
Worked in full in Closing the Deal by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A completion accounts deal is priced on an enterprise value that assumes the business arrives with a normal level of working capital. The peg is that normal level written as a number, and the adjustment pays the seller for any excess and charges it for any shortfall. On a business with a flat working capital profile any sensible definition gives the same answer. On a seasonal one, the definition is the negotiation.
| Month | NWC | Month | NWC |
|---|---|---|---|
| Jan | 17.0 | Jul | 22.4 |
| Feb | 17.8 | Aug | 21.2 |
| Mar | 19.0 | Sep | 19.8 |
| Apr | 20.6 | Oct | 18.6 |
| May | 22.0 | Nov | 17.6 |
| Jun | 23.0 | Dec | 17.2 |
The business builds stock and receivables into its summer peak and releases them into the winter: a swing of 6.0 million between the low of 17.0 and the high of 23.0. The equity price before adjustment is 60.0 million. In the completion year the business runs 5 per cent above last year's balances, month by month; the parties' business plan assumed 4 per cent growth.
Trailing average peg = sum of the last 12 month-end balances ÷ 12
Same-month peg = balance in the completion month a year earlier × (1 + agreed growth)
Adjustment = NWC at completion − peg; price = equity value + adjustment
In Excel: =AVERAGE(B2:B13) for the average peg; =INDEX(B2:B13,MonthNo)*(1+PegGrowth) for the same-month peg; =NWC_Completion-Peg for the adjustment.
The twelve balances sum to 236.2, so the average peg is 236.2 ÷ 12 = 19.68 million. Completion falls on 30 June. Net working capital delivered is last June's 23.0 grown 5 per cent, 24.15 million.
| Peg definition | Peg | Delivered | Adjustment | Price paid |
|---|---|---|---|---|
| Trailing twelve-month average | 19.68 | 24.15 | +4.47 | 64.47 |
| Same month, grown 4% | 23.92 | 24.15 | +0.23 | 60.23 |
| Last year-end balance | 17.2 | 24.15 | +6.95 | 66.95 |
Under the average peg the buyer pays 4.47 million more than the headline, 7.4 per cent of the equity price, for a business that has done nothing unusual: it has simply been bought at the top of its season. Under the same-month peg the seller receives 0.23 million, which is the real news in the balance sheet, the 1 per cent by which the business outgrew the plan. The year-end peg, which nobody should agree, is shown because it is what a careless definition such as "net working capital per the last audited accounts" produces.
| Completion month | Delivered | vs average peg | vs same-month peg |
|---|---|---|---|
| Jan | 17.85 | −1.83 | +0.17 |
| Mar | 19.95 | +0.27 | +0.19 |
| Jun | 24.15 | +4.47 | +0.23 |
| Sep | 20.79 | +1.11 | +0.20 |
| Nov | 18.48 | −1.20 | +0.18 |
Run all twelve months and the average peg pays between −1.83 and +4.47 million, a spread of 6.30 million on a 60.0 million price, for the same business on the same terms. The same-month peg moves between +0.17 and +0.23, a spread of 0.06. One definition measures the season; the other measures the seller.
Notice too that the average peg is biased against a growing business even before seasonality. The year's actual balances average 20.67 million against a peg of 19.68, a gap of 0.98 million that the seller collects simply because last year's average is a year out of date. A buyer agreeing to a trailing average on a growing target should at least grow it.
The de minimis interacts with the definition. With a 0.25 million threshold, the same-month adjustment of 0.23 million at a June completion pays nothing, whether the basket is tipping or deductible. Against the average peg, every month except October clears it. A threshold sized for a flat business is decorative on a seasonal one.
Whatever the definition, the peg and the completion balance must be measured on the same accounting policies, with the same items in and out. A peg computed from management accounts and a completion balance prepared under the buyer's year-end policies, with a stricter stock provision or a tighter bad debt reserve, produces an adjustment that has nothing to do with working capital at all. The agreement should name the policies, the order in which they apply, and an illustrative statement built on the same twelve months the peg came from.
The common mistake is to treat the peg as an accounting question settled late by the advisers, after the price is agreed. It is a price term. The seller will say that the buyer gets the June excess back as cash when the season unwinds, and between June and November 5.67 million does come back; the buyer will say the business needs that working capital again next summer, so it is normal working capital and not an excess to pay for. Both are right, which is the point: an average peg turns the completion date into a bet, and whoever controls the timetable controls the bet. Fix the completion month, or match the peg to it.
Compute the trailing average, then compute the peg for the actual completion month and grow it at the plan rate. If the two differ by more than the de minimis, the definition is a price negotiation and should be had as one. The working capital workbook in the free companion files for Closing the Deal runs five definitions of the peg against every month of a seasonal year, and the locked box ticker article covers the mechanism that avoids completion accounts altogether.
Usually yes: the price moves by the full difference between the net working capital delivered at completion and the peg, in both directions, unless a de minimis or collar applies. On an illustrative 60.0 million equity price, delivering 24.15 million against a 19.68 million average peg raises the price to 64.47 million, 7.4 per cent of the equity.
Because a trailing average compares the completion month with an annual mean, so the adjustment measures the season rather than anything the seller did. In the illustrative case the average peg pays between -1.83 and +4.47 million depending on the month, while a same-month peg grown at 4 per cent pays +0.17 to +0.23 million in every month.
Below the threshold nothing is paid; above it, either the whole amount (a tipping basket) or only the excess (a deductible). With a 0.25 million threshold, the same-month adjustment of 0.23 million at a June completion pays nothing under either. Against an average peg the 4.47 million adjustment clears any threshold of that size.
This article is one calculation from Closing the Deal. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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