Working Capital in Merger & Acquisition Transactions - Part 3 - Setting the Target and Documentation Recommendations

Sep 16, 2026

Working capital in M&A transactions is explored through a practical, advisory framework focused on how the parties set the Working Capital “Target” or “Peg” and reduce disputes at reconciliation. The guidance covers the typical transaction stages from Letter of Intent through due diligence, closing estimates, post-closing reconciliation, and settlement, including what must be agreed regarding scope and calculation. The LTM average method is detailed, showing how to derive an absolute target from average working capital assets and liabilities, plus risks when historical balance-sheet profiles shift.

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Working Capital in Merger & Acquisition Transactions

Transaction stages and agreement points

Setting the working capital target (Peg)

LTM average method and practical example

Adjusting methodology when LTM is problematic

EDUCATIONAL SERIES PART 3, PAGE 1 AN EXPERT VIEW – CORPORATE FUEL PART 3: Working Capital in Merger & Acquisition Transactions Setting the working capital target and our recommendations on the best ways to document agreement on what constitutes working capital and the calculation methodology for the purposes of reconciliation 3 We continue with our series on Working Capital in M&A Transactions – Our expert views on how it works and what you can do to protect your interests through an M&A transaction. In earlier parts of this series, we discussed why working capital is most often included in a business when it is sold and then covered the mechanics of including working capital and the impact of resulting changes on the Buyer and Seller. In this section, we discuss the process of setting the working capital target, the typical and not-so-typical methods used and some of the potential risks of poor planning or lack of preparation. Let us review the typical scope of an M&A transaction and the several stages of the transaction process and the related working capital activities. The typical scope of an offer made by a Buyer in a Letter of Intent to purchase a business is that it is on a “cash-free, debt-free basis and includes a normal level of working capital”, sufficient to operate the business and its current activities. At the time a Letter of Intent (LOI) is negotiated, you typically should agree on the scope of the transaction, how you will determine what constitutes a “normal level” of working capital and any special circumstances. Later, in the due diligence phase of the project, you typically set the Working Capital “Target” or “Peg”. Transact ion Stages >>> LSettegre of Intent >>> DSutaegDeiligence Agree that WC included Set Working Capital in deal. “Target” or “PEG”. Agree on LTM* or other Method for determining the “Target” Scope, Measurement and other special circumstances. (*Last Twelve Months) >>> Closing Stage WC estimated for Closing calculations.(Estimated vs. Target) >>> Post Closing Stage Within 60-120 days of Closing, WC Reconcilliation Process. (Actual Received vs.Target) >>> Settlement Stage After Agreement on Reconcilliation,$ Settled betweeen Parties. “At the time a Letter of Intent (LOI) is negotiated, you typically should agree on the scope of the transaction, how you will determine what constitutes a “normal level” of working capital and any special circumstances.” Copyright © Corporate Fuel Advisors, LLC 2021 All Rights Reserved [www.corporatefuel.com](www.corporatefuel.com) EDUCATIONAL SERIES PART 3, PAGE 2 AN EXPERT VIEW – CORPORATE FUEL LTM (Last Twelve Months) Average Method The most common method used to arrive at a Working Capital Target is to take the average month-end balances of each working capital account over the prior twelve months. Using the LTM average of each working capital account, you can then determine the Average Net Working Capital for that historical period. To be clear, you take the average of the current assets that are within the transaction scope and subtract the average of the current liabilities that are included in the transaction scope. The Target will an absolute number. Here is an example: Project Sample Working Capital Analysis Total WC Assets Working Capital Liabilities Total Accounts Payable Total Accrued Liabilities $4,050 $3,956 $4,175 $4,705 $4,308 $4,892 $5,217 $5,231 $5,517 $5,638 $4,991 $5,071 $773 $566 $703 $1,312 $1,083 $972 $1,028 $1,327 $1,149 $873 $881 $1,102 174 99 135 52 181 140 311 318 414 393 261 199 $4,813 $981 $223 Last Twelve Month Period ($ in thousands) Sept ‘19 Oct ‘19 Nov ‘19 Dec ‘19 Jan ‘20 Feb ‘20 Mar ‘20 Apr ‘20 May ‘20 Jun ‘20 Jul ‘20 Aug ‘20 LTM Average Working Capital Assets Accounts Receivable Inventory $3,040 1,010 $2,900 1,056 $2,965 1,210 $3,355 1,350 $3,293 1,015 $3,642 1,250 $3,917 1,300 $4,211 1,020 $4,360 1,157

FAQs

What transaction stages are used to manage working capital in an M&A deal?

The document outlines stages from LOI negotiation to due diligence, closing calculations comparing estimated versus target working capital, post-closing reconciliation comparing actual versus target, and final settlement after agreement on reconciliation.

How is the Working Capital “Target” or “Peg” typically determined?

A common approach uses the LTM (Last Twelve Months) average by taking average month-end balances of each working capital account over the prior twelve months to compute average net working capital.

When might the LTM method be problematic and require adjustment?

If changes within the prior twelve months materially alter the balance-sheet profile—such as a sold business unit, altered practices, new client payment terms, or liquidated aged inventory—the parties may adjust the methodology instead of strict LTM adherence.

Sep 16, 2026

Uploaded by Felix Montgomery