How does a working-capital peg work on a manufacturing close?
Buying a manufacturing business without a written method is how people buy rust at full value. The deal-cluster companion on peg and true-up is the mechanics page. This page is how a buyer underwrites the number before the LOI.
Write the formula before anyone argues about a dollar
A usable peg definition states:
- Components: AR + inventory − AP (and whether accrued liabilities sit in or out)
- Exclusions: cash, debt, income taxes, related-party, customer-owned stock, non-operating deposits
- E&O policy and who applies it
- WIP / POC method
- Look-back (often trailing 12 months — confirm, do not assume)
- Count date and true-up window
- Dispute path
Enterprise value is cash-free and debt-free. Excess cash and interest-bearing debt sit outside. If you put them in the peg, you will double-count or miss a wire.
Inventory and WIP is the stock analysis. The peg is the contract that turns that analysis into a dollar. A purchase agreement that introduces a new peg definition after LOI is a renegotiation dressed as paper.
| Peg fight | Buyer position that holds up | Seller line that should fail |
|---|---|---|
| Look-back | A period that matches seasonality | Cherry-picked peak month |
| WIP | Cost incurred, finishable without the seller | Quoted margin on half-done jobs |
| E&O | Policy you would finance | "Everything is good" |
| Customer-owned | Excluded | Counted because it sits in the cage |
| Quality holds | Out of eligible inventory | Treated as finished goods |
| Related-party AR | Scrubbed | Left in to puff the average |
| True-up timing | After the signed physical | "We'll estimate" |
ISM Prices 71.1 in August 2026 (Source: ISM) is why aged raw at last year's cost may need a reserve. Fed utilization 76.0% in July 2026 (Source: Fed G.17) does not value a cage.
True-up, holdback, and the close count
The true-up settles delivered NWC versus the peg. If you deliver light, you owe. If you deliver heavy, the seller may be owed — unless the extra is unsaleable stock you already agreed to exclude. Write that sentence.
Closing is a signed physical, a cut-off for receipts and shipments, and a calculator both sides can audit. If the seller refuses a physical, walk or hold back enough cash that a miss is not your problem.
A quality of earnings can test whether the reserve policy matches history and whether job-cost WIP is religion or math. It cannot stand in for the count.
ABL is a cousin, not a twin. Market-practice advances — 70–85% of eligible AR, 40–60% of eligible inventory, lower on WIP — describe monthly availability. They do not set the peg. Confusing them is how you wire a price the revolver cannot support in month two.
Size, SBA, and why "it's only working capital" is expensive
Main Street manufacturing in BizBuySell's 2021–2025 set cleared at 2.75x median SDE on about $268k SDE (Source: BizBuySell via Iconic). On that band, a $90,000 WIP miss is not noise. SBA 7(a) still caps at $5 million with a 10% injection under SOP 50 10 8 (Source: SBA). The loan does not rescue a bad peg. It funds a project. If the project assumed $400,000 of NWC and you received $280,000 of rust, you funded a hole.
BizBuySell 2025 put manufacturing at a 223-day median close (Source: BizBuySell). Use part of that calendar to sample inventory before you freeze the peg, not after exclusivity expires.
Stanford's $16 million / 6.2x / ~25% margin median (Source: Stanford GSB) describes companies that often have cleaner inventory controls. It is a search-fund median, never a job-shop multiple, and never a reason to skip the physical on a job shop.
Seasonality, progress bills, and other honest complications
A trailing-12 average can still lie if the plant is seasonal and you are closing at the peak or the trough. Building-products and wood shops feel housing. Food co-pack feels slots. Defense suppliers feel continuing resolutions. Write whether you will use a 12-month average, a 12-month average excluding a named anomaly, or a monthly normalized figure. Do not pick the one that favors you after you see the chart.
Progress billing and milestone invoices create unbilled AR and deferred revenue that a simple AR + inventory − AP formula will miss. Machinery OEMs and long-cycle fabricators live here. Put unbilled receivables and customer deposits in the definition or they become a fight. The deal peg page is the companion for exhibit language. This page is the underwriting judgment: if you cannot explain the billings in one paragraph, you cannot peg them.
Related-party AR from the seller's other company is not eligible just because it is old. Neither is AR that is really a loan. Cross-aged balances that an ABL field exam would kick should not puff the peg average. Market-practice ABL advances remain 70–85% of eligible AR — practice, not a quote — and they are a useful honesty check on what "AR" meant in the CIM.
How to sample before you freeze the number
Do not freeze a peg on a CIM chart. Sample 20 raw lots, 15 WIP jobs, and the finished-goods holds. Age them. Ask who owns the tooling on those jobs. If the sample is ugly, the average is uglier. Inventory analysis is the long form. The peg freeze is the contract that follows the sample.
A QoE that says job-cost is unreliable is a signal to tighten WIP language, not to "use customary." Counsel can write a holdback sized to the sample miss. That is still cheaper than buying hope at full value.
SBA 7(a) still caps at $5 million with a 10% injection (Source: SBA). The equity check you write has to survive a light true-up. Combined 7(a)+504 can reach $10 million for fitting borrowers (Source: SBA). It does not reprint cash if the cage is rust.
Main Street files near 2.75x SDE and ~$268k earnings (Source: BizBuySell via Iconic) feel peg misses as turns. Search-fund median files at $16 million / 6.2x / ~25% margin (Source: Stanford GSB) often have better controls — and that median is still never a job-shop multiple. Either way, write the method.
IBBA's 83% three-offer statistic on deals over $5 million (Source: IBBA) tempts buyers to accept "customary" to win. That is how you win a hole. Fed utilization 76.0% (Source: Fed G.17) does not value WIP. Travelers do.
A composite peg math walk — not a listing
Suppose trailing-12 average AR is $620,000, inventory $410,000 before E&O, AP $190,000. E&O on inserts and dead finished goods is $70,000. Customer-owned resin in the cage is $40,000 and must come out. WIP includes $55,000 of quoted-margin hope the QoE restated to $20,000 of cost. Eligible inventory becomes $410,000 − $70,000 − $40,000 − $35,000 = $265,000. Peg ≈ $620,000 + $265,000 − $190,000 = $695,000.
If close delivers $610,000 on that definition, you are $85,000 light. On a Main Street file near ~$268k SDE and 2.75x (Source: BizBuySell via Iconic), that miss is a third of a turn. On a Stanford-shaped $16 million / 6.2x / ~25% margin file (Source: Stanford GSB) it is smaller relative to EV — and that median is still never a job-shop multiple. Either way, write the definition so the $85,000 is a calculator, not a fight.
SBA 7(a) inside $5 million with a 10% injection (Source: SBA) does not reprint the $85,000. Combined 7(a)+504 can reach $10 million (Source: SBA). Same sentence. Count.
ISM Prices 71.1 (Source: ISM) is why the $70,000 E&O existed. Fed utilization 76.0% (Source: Fed G.17) is not in the formula. IBBA's 83% three-offer statistic (Source: IBBA) is why buyers skip writing the formula. Do not skip it.
Jason Taken is a business broker, not a CPA. Educational information only. Confirm peg language with counsel and the accountant who will compute the true-up. No outcome is guaranteed.
Questions the peg definition should answer in one paragraph
What is in. What is out. What is the look-back. How is WIP valued. How is E&O applied. When is the count. How is the true-up calculated. If that paragraph does not exist, "customary" will become a fight.
Write it. Sample before you freeze. Seasonality can lie even inside a trailing-12. Progress bills create unbilled AR and deposits a simple formula will miss. Related-party AR is not eligible because it is old. ABL eligibility is a useful honesty check. It is not the peg.
On a small SDE file an $85,000 miss is a third of a turn. The loan does not reprint it. Count.
HedgeStone will not accept "customary NWC" on a plant file. Write the paragraph. Sample the cage. Then freeze the number. An $85,000 miss on a small SDE file is a third of a turn. The loan does not reprint it.
Pick the look-back after you plot the season, not before
A trailing-12 average can still lie if the plant ships 40% of the year in one quarter. Plot monthly AR, inventory, and AP before you freeze the window. If the season is real, a trailing-12 that includes the dead months will underfund the peak, and a three-month snapshot taken in the peak will overfund the trough. Unbilled milestones and customer deposits will break a simple AR-plus-inventory-minus-AP sentence. If the plant progress-bills, put those lines in the definition before anyone averages a year of lies. Related-party AR is not eligible because it is old. ABL eligibility is a useful honesty check. It is not the peg. On a small SDE file an $85,000 miss is a third of a turn. The loan does not reprint it. Write the paragraph. Sample the cage. Then freeze the number.