Working-capital peg and true-up on a manufacturing sale

This is the deal-mechanics page every seller article on this site already points to. The buyer-underwriting cousin lives at peg explained for buyers. Surviving quality of earnings as a seller is how the recast survives the same week. How it works is the process that should freeze the method in the letter of intent, not in a midnight exhibit.

Why does a plant peg collapse when someone copies a retailer leftover?

Retail working capital is mostly sellable SKUs and trade payables. A manufacturer is a job-cost system with three inventory states, two ownership problems, and often a progress-bill schedule. Raw bar, resin, and inserts age on a different clock than a finished assembly. WIP is cost incurred on a traveler, not quoted margin on a half-cut job. Finished goods can sit on a quality hold that an ABL field exam would kick. Consigned resin in the cage is not the seller's asset. Customer-owned fixtures and check gauges are not inventory just because they occupy a rack. Unbilled change orders and milestone work-in-place are working capital only if the exhibit says so.

Copying "AR + inventory − AP, customary" onto that pile is how both sides discover, after the wire, that they bought or sold a different company. The inventory count at closing is the photograph. The peg is the caption that has to be written first.

Census CBP 2023 counted 284,452 manufacturing establishments, and 68.4% of them have fewer than 20 employees (Source: Census CBP). Those shops still hold WIP. Size does not create a retailer exemption.

ISM Prices printed 71.1 in August 2026 (Source: ISM). Aged raw bought in a cheaper year can need a reserve even when the cage looks full. Federal Reserve G.17 utilization at 76.0% in July 2026 (Source: Fed G.17) describes the industry, not the eligibility of a particular lot.

How should the letter of intent freeze method, look-back, and exclusions?

A usable LOI peg clause is a paragraph, not an adjective. It states components, exclusions, the E&O policy, the WIP rule, the look-back, the count date, and the true-up window. Enterprise value stays cash-free and debt-free. Income-tax balances and related-party fluff stay out unless both sides write them in on purpose.

Look-back is not automatically trailing twelve months. Building-products shops, food co-packers, and defense suppliers have seasons and continuing-resolution pauses. Plot monthly AR, inventory, and AP before you freeze the window. A trailing-12 that swallows a dead quarter will starve a peak close. A three-month snapshot taken in the peak will overfund a trough. Write which chart you used.

Quality of earnings explained can test whether reserves and job-cost WIP match history. It cannot invent a definition the LOI refused to write. Sellers who want the QoE week to stay short should read surviving quality of earnings as a seller and bind the same inventory method the peg will use.

IBBA Pulse Q1 2026 reported that 83% of deals over $5 million drew three or more offers (Source: IBBA). That is a process fact, not a promise that your file will. It is also why buyers sometimes accept "customary" to win a bake-off. Winning a hole is still a hole.

What does an honest true-up calendar look like after the physical?

The true-up is arithmetic. Delivered eligible NWC minus the peg equals a cash payment one way or the other, subject to a collar if you wrote one. The photograph is the signed inventory count: cutoff for receipts and shipments, tagged lots, WIP percent that both counters initialed, and a list of items kicked for E&O or customer ownership.

If delivered NWC is light, the seller owes. If it is heavy with eligible, shippable product, the buyer may owe. If it is heavy with rust, obsolete inserts, or customer-owned fixtures the exhibit already excluded, the extra units do not create a seller credit. Write that sentence before anyone starts the count.

Dispute path belongs in the same exhibit: who prepares the first certificate, how many days the other side has to object, and whether a named accountant breaks a tie. Leaving that blank is how a 30-day true-up becomes a winter.

Purchase-price allocation and Form 8594 will usually park inventory in Class IV. The peg dollars and the 8594 inventory line should tell the same story. They will not if one side is still using a retailer leftover.

How do earnings quality, SBA cash, and size-band multiples change the peg fight?

A dead add-back and a light peg are different wounds that land in the same week. Main Street manufacturing in BizBuySell's 2021–2025 set cleared at 2.75x median SDE, interquartile 2.04x–3.59x, on about $268k discretionary earnings and about $1.13 million revenue (Source: BizBuySell / Iconic). On an sde-under-1m general CNC / job shop file inside that quartile band, a $95,000 eligibility miss is not a rounding error. Specialty machining still under $1 million SDE can trade in a wider observed 3.0x–5.0x SDE conversation; the peg miss still comes off cash, not off a slogan.

Lower-middle files price on adjusted EBITDA. Advisor-survey and reported-deal ranges — not an appraisal — still need a size band and a process row: general fab at EBITDA $1–3 million often talks 4.0x–5.5x; precision machining / plastics in that band 5.0x–6.5x; aerospace AS9100 / medical ISO 13485 in that band 6.0x–8.0x. A $180,000 WIP restatement moves those conversations. Stanford's 2024–25 search-fund median neighborhood — about $16 million purchase, ~6.2x EBITDA, ~25% margin (Source: Stanford GSB) — describes a different company than a 9% job shop. A clean peg does not mint that multiple.

SBA 7(a) still caps at $5 million with a 10% equity injection under SOP 50 10 8 (Source: SBA). Combined 7(a)+504 can reach $10 million for fitting borrowers (Source: SBA). Neither product reprints cash if the cage delivered light. The injection is for the project. The true-up is for the cage.

Inventory in valuation is the pricing essay. This page is the contract that turns that essay into a wire.

Which manufacturing classes must the exhibit name before anyone averages a year?

Name raw by commodity and age. Name WIP by job and by the cost-to-complete rule — cost incurred that a successor can finish without the seller standing at the machine, not the quoted margin on the acknowledgment. Name finished goods as shippable units not on a quality hold. Name consigned inbound and outbound so title matches the cage. Name customer-owned tools, fixtures, and safety stock so nobody "finds" $40,000 of someone else's steel. Name unbilled project work and customer deposits so a simple AR + inventory − AP sentence cannot hide a machinery-OEM billing cycle.

ABL advance-rate folklore — often 70–85% of eligible AR and 40–60% of eligible inventory, lower on WIP — is market practice for monthly availability. It is not the peg. Confusing the revolver with the purchase-price true-up is how month two surprises a buyer who thought they had funded NWC.

Selling the company without a peg paragraph is how you donate the last argument of the deal. Buyers who want the underwriting view should stay on peg explained for buyers. Both sides still need this exhibit.

What does an illustrative plant true-up look like when the classes are honest?

Illustrative only — not a listing and not a quote.

Trailing-12 eligible AR $540,000. Inventory book $690,000 before adjustments. E&O on dead inserts and obsolete finished goods $85,000. Customer-owned resin and fixtures in the cage $62,000. WIP carrying $48,000 of quoted-margin hope that the QoE restated to $18,000 of finishable cost. Eligible inventory becomes $690,000 − $85,000 − $62,000 − $30,000 = $513,000. Eligible AP $210,000. Peg ≈ $540,000 + $513,000 − $210,000 = $843,000.

Close physical, after the same kicks, delivers $768,000. Seller is $75,000 light. On an sde-under-1m commodity fab file talking inside the BizBuySell manufacturing interquartile around 2.75x (Source: BizBuySell / Iconic), that light delivery is a visible piece of a turn. On an EBITDA $3–10 million precision shop talking a synthesized 5.5x–7.5x band, it is smaller relative to enterprise value and still real cash. Stanford's $16 million / 6.2x / ~25% median (Source: Stanford GSB) is a search-fund neighborhood, never a job-shop multiple, and never a reason to skip the physical.

SBA 7(a) inside $5 million with a 10% injection (Source: SBA) does not reprint the $75,000. BizBuySell's 223-day 2025 manufacturing median close (Source: BizBuySell) is a planning number, not a guarantee; spend some of those days sampling lots before you freeze $843,000.

What happens when seasonality, progress bills, or consignment break the average?

Seasonality is a chart, not a speech. If 40% of shipments leave in one quarter, say whether the peg uses a trailing-12, a trailing-12 with a named anomaly stripped, or a monthly normalized figure. Do not pick the chart after you see which one favors you.

Progress billing creates unbilled receivables and customer deposits a simple three-line formula will miss. Machinery builders and long-cycle fabricators live here. Put those lines in the definition or they become the fight that burns the exclusive.

Consignment and vendor-managed inventory are title questions. If the resin is still the compounder's, it is not the seller's inventory. If finished goods sit at a customer dock on consignment, ask who has title and who has the quality risk. Customer-owned tools are the same question with steel and aluminum instead of resin.

Related-party AR from the seller's other entity is not eligible because it is old. Cross-aged balances an ABL examiner would reject should not puff the average you are about to capitalize.

Jason Taken is a business broker with HedgeStone Business Advisors. He is not a CPA, not counsel, and not the person who will sign the true-up certificate. Educational information only. Confirm exhibit language with the lawyers and the accountants who will compute it. No peg, multiple, or close date is guaranteed. Class raw, WIP, and finished on the working-capital peg calculator before anyone averages a year.