Does working capital affect valuation?
Yes, through the working capital peg — the normal level a buyer expects to come with the business. Anything short is deducted from what you receive.
Yes, and this is where value most often leaks quietly. Buyers expect a normal level of working capital to transfer with the business. Anything below that level is deducted from what you receive, and the level is usually set as a twelve-month average.
How the peg works
- 12-month average working capital
- €640,000
- the peg
- Actual at completion
- €460,000
- Deducted from proceeds
- −€180,000
The logic is straightforward: the buyer is purchasing a business that can operate on day one. If you have collected receivables aggressively and stretched payables to lift the cash balance, you have moved money from working capital into cash — and the buyer will move it back.
What owners get wrong
What to do
Understand your own seasonal pattern before anyone proposes a peg. A business whose working capital swings €300,000 between March and September has a legitimate argument about which average is fair, and that argument is much easier to make with twelve months of data than with an opinion.
Common valuation mistakes covers this among the nine; how to value a business covers the bridge from enterprise to equity value.