Buying or selling a company in London quickly teaches you that valuation is only half the battle. The real tension shows up a few days before completion, when lawyers and accountants start trading spreadsheets over something called the working capital peg. Get it right and the handover feels smooth. Get it wrong and both sides can spend weeks haggling over receivables, aged stock, and what counts as debt. I have seen confident deals wobble at the finish line because the parties did not align on this one concept early enough.
Working capital pegs sit at the heart of small business sales, whether you are looking at a creative agency near Shoreditch, a parts distributor by Heathrow, or a family-owned trades business in London, Ontario. If you have been scanning listings that say companies for sale London or business for sale in London, or even searching off market business for sale, the peg will eventually come up in diligence. It protects both buyer and seller, and it sets expectations for what the business will look like on day one.
What the peg is and why it matters
A working capital peg is a target level of net working capital that the seller agrees to deliver at completion. Net working capital is usually defined as current assets minus current liabilities, with cash and anything debt-like excluded. In practice, it covers trade receivables, inventory, prepayments, and trade payables, plus a few deal-specific items.
The peg does not change enterprise value. Instead, it reconciles the equity value you pay at closing. If actual working capital at completion is higher than the peg, the seller has delivered more fuel in the tank, so the buyer pays the surplus. If it is lower, the price is adjusted down so the buyer is not underwater on day one. It is a simple idea that becomes complicated because the real world is messy. November retail peaks, January cash pinches, lumpy contract billing, and supply chain delays all show up in the numbers.
In London, I often see two buyer profiles. Private owners who want one dependable small business for sale London, and financial buyers rolling up sectors. Both push for pegs because they have lived the pain of chasing cash in the first 30 to 60 days post close. Sellers, on the other hand, worry about leaving too much behind, especially if they have just worked hard to collect receivables before completion. That gap is where the peg does its job.
Grounding the definition: what counts and what does not
You cannot negotiate a peg until you agree on the calculation, and you cannot agree on the calculation until you define the components. Accountants love to bury the logic in schedules. It pays to write it out in plain English and attach it to the SPA.
Here is a simple example from a London-based B2B services company with VAT registration:
- Current assets include trade receivables net of specific bad debt reserves, accrued income or work in progress where it is earned, inventory at cost if any, and prepayments. Cash is excluded. Current liabilities include trade creditors, accrued expenses, payroll accruals, and VAT payable. Debt-like items such as bank overdrafts, directors’ loans, corporation tax payable, customer deposits for undelivered work, and deferred revenue are excluded from working capital and treated separately as debt-like in the completion accounts.
Suppose at completion, the company has 600 thousand pounds of receivables, 50 thousand inventory, 40 thousand prepayments, and 480 thousand of payables and accruals. Net working capital is 600 + 50 + 40 minus 480, so 210 thousand. If the peg is 200 thousand, the buyer owes a 10 thousand true-up. If the result were 170 thousand, the buyer would deduct 30 thousand from the equity cheque.
Why exclude cash? Because enterprise value already assumes cash-free, debt-free. Why exclude deferred revenue? Because it represents services you owe in the future. That is effectively a funding need like debt. The principle is consistent across jurisdictions. In London, Ontario, I see the same treatment in businesses for sale London Ontario, with GST/HST instead of VAT. The goal is to make sure tomorrow’s working capital needs are fairly shared.
Seasonality and the London reality
Setting a peg without looking at seasonality is like buying a jacket without checking the weather. A West End retail shop can carry very different stock levels in November compared to March. A media agency bills heavy in Q4. A food distributor in Park Royal runs tight payables cycles and fast inventory turns that dip before holidays. If you simply take a month-end snapshot, one side will be surprised.
Most deals in the UK use either completion accounts or a locked box. With completion accounts, you target a peg and do a true-up after closing. With a locked box, you lock at a past balance sheet date, include a leakage covenant, and skip the working capital true-up at completion. SMEs in London mostly use completion accounts because records vary in quality and seasonality is hard to lock neatly. In Canada, especially with owner-managed companies and business brokers London Ontario, completion accounts are also common, though on smaller deals you still see simpler, flat pegs and fewer adjustments.
One owner I worked with ran a specialty coffee equipment supplier near King’s Cross. Autumn trade shows spiked orders in September and October, receivables shot up in late October, then cash came in mid November. The seller wanted a peg based on the latest high month. The buyer wanted a three-month average. We settled on a 12-month median, adjusted for a product line the seller had just discontinued. Both sides slept better.
How to set a defensible peg
A fair peg starts with data. Pull at least 12 months of monthly trial balances. If the business is strongly seasonal, go 24 months. Look beyond totals and inspect the guts: DSO, inventory turns, payables days, and the mix of accruals. If the company changed terms with a key supplier or launched a new product, segment the data before and after that shift.
Here is a straightforward way to build a peg that stands up under negotiation:
- Map the definition. Agree what is in and out of net working capital, plus the treatment of VAT or GST/HST and any customer deposits. Normalize the base. Exclude discontinued lines, non-recurring orders, and one-off prepayments. Adjust inventory to remove obsolete or slow-moving stock at an agreed write-down. Choose the window. Use a trailing 12-month average or median. If the business is volatile month to month, a median filters noise. If it grows steadily, a weighted average over the last six months might capture the new normal. Validate with ratios. Check DSO, DPO, and inventory days against operational reality and supplier terms. If the implied DSO jumps from 45 to 70 days in the last quarter, find the driver before you lock the peg. Run sensitivities. Show how the peg would move under reasonable swings in receivables or inventory. It keeps surprises out of the legal drafts.
That five step approach keeps emotion out and puts the focus on how the business actually runs.
Edge cases the peg needs to respect
Not all businesses fit the clean textbook picture. London is full of category nuances that call for judgment.
Negative working capital models. Some retailers and ticketing businesses collect cash upfront and pay suppliers later. Net working capital can be negative by design. The peg should reflect the normal negative level. Buyers sometimes try to set the peg at zero, which would hand them free cashfloat that the business does not normally carry. Sellers should push for the historic negative average. I once saw a buyer of a multi-location beauty retailer argue for a zero peg because inventory looked light. The store’s gift card liability and unredeemed treatments drove a natural negative position. We anchored the peg to the three year median, adjusted for store closures during a refurbishment cycle.
Project-based services and WIP. Creative agencies, engineering consultancies, and fit-out contractors carry work in progress. If WIP recognition is subjective, embed a method for valuing it at completion, often cost plus a percentage of completion cap verified by project schedules. If WIP is excluded, the peg needs to rise to avoid starving future billings.
Subscription or maintenance revenue. Deferred revenue belongs in debt-like items, but you still need operating float to deliver. If a software support business sitting in Shoreditch carries deferred revenue but also has low receivables because it bills annually in advance, a naive peg set from averages might drop too low. Test the forward delivery schedule and confirm payroll and subcontractor accruals match.
Hyper growth or contraction. If revenue is rising 40 percent year on year, last year’s working capital will not fund next quarter’s. In growth, move to a more recent window or use a forward-looking build that ties DSO, DPO, and inventory days to the next quarter’s forecast. In contraction, be careful the peg is not inflated by past levels the business will not need.
Supply chain dislocation and inflation. In 2022 and 2023, I saw importers hold two or three months of extra stock to secure supply, with prices up 10 to 20 percent. Pegs needed an inventory normalisation memo, or they would have locked in a bloated level that neither side thought sustainable. If you are buying a distributor by the Thames Gateway or in London, Ontario’s industrial parks, look at landed cost changes and shipping lead times. Do not forget currency swings if the business buys in euros or dollars and sells in sterling or Canadian dollars.
What due diligence should uncover
A good financial review does not just collect statements. It builds a picture of how cash moves through the business and where it sticks. Ask to see the receivables aging by customer with notes on disputes and credit limits. Check credit notes issued after month end. Review the inventory aging and write-down policy. Reconcile payroll accruals to actual pay runs. Match supplier terms to the payables aging, and check for round sum balances that hide accrued liabilities.
Cash is excluded from working capital, but bank sweeping and overdrafts affect behaviour. In the UK, many SMEs run authorised overdrafts that function like cash management tools. Those are debt-like and should be part of the debt-free, cash-free adjustment, not net working capital. Same in Canada with operating lines. Clarity here avoids double counting.
Be explicit about taxes. VAT receivable or payable should be in the working capital calculation if it is part of the normal cycle. Corporation tax and income taxes sit outside. In London, Ontario, GST/HST receivable or payable follows the same logic.
Small versus mid-market differences
For the smallest deals, especially where a solo buyer wants to buy a business in London or buy a business in London, Ontario, the peg can be as simple as an agreed flat number with a short true-up period. Simplicity helps when the accounting is basic and legal fees need to be contained. Business brokers London Ontario often steer towards practical pegs that reflect the last 12 months and adjust only for obvious anomalies. If you are talking to a local business broker London Ontario about a small business for sale London Ontario, expect a very hands-on process with management accounts and bank statements rather than audited packs.
As deals get larger or private equity steps in, the peg tends to be formulaic with a schedule spelling out inclusions, a sample calculation from a reference date, and dispute resolution mechanics. In the UK, SPAs frequently allow a short post-completion window to deliver completion accounts, followed by expert determination if the parties cannot agree. Locked box deals shift the debate to leakage and interest charges. Whichever path you use, tie it back to how the company actually breathes day to day.
Negotiation levers that change outcomes
A fair peg does not carry the whole burden of protecting cash. The SPA has other places to relieve pressure, and using them can bridge gaps without budging the number.
- Define acceptance and credit note policies. If the seller issues generous credits after completion for pre-close sales, receivables will sag. Cap buyer exposure by agreeing on credit policy and sharing credit risk for a short window. Clarify inventory quality. Agree on an aging test and write-down for slow movers, and a process to count and price stock near completion, especially for importers and retailers. Nail WIP recognition. For project work, include an exhibit that sets recognition rules and a review right for the buyer, with thresholds for when to get a third party to opine. Set collection covenants. If the seller keeps collecting pre-close receivables for a transition period, require daily remittances and reporting to keep the cash waterfall clean. Carve-out adjustments. If the business is carving out a division, make explicit which intercompany balances and shared accruals stay or go. It avoids ballooning payables in the first month.
I have watched deals unstick when the parties moved two or three of those levers purposefully. A buyer once conceded a slightly higher peg but won strict inventory aging tests and a cap on post-close credit notes. The math worked out in their favour within 45 days.
Practical case sketches
A central London marketing agency. The seller billed project fees with 30 day terms. DSO ran 52 days, ballooning after big campaigns. Payables sat near 35 days. The initial peg was set at the 12 month average of 260 thousand pounds. Diligence found that two enterprise clients had systematically slow approvals that pushed DSO to 75 days in Q3. The parties re-baselined the peg using a median and a separate adjustment for those two clients, then wrote a collections covenant for the first 60 days. The final peg landed at 240 thousand with a side letter on those clients. The buyer avoided a cash dip, and the seller did not subsidise the slow payers indefinitely.
A specialty parts distributor in West London. Inventory expanded by 30 percent year over year due to supply chain hedging. The seller argued for a peg that included the higher level. The buyer’s analysis showed 18 percent of SKUs had not moved in 270 days. After a joint count and a cost-to-market test, they created a two tier peg. Normal inventory at historic turns sat in working capital. Excess stock above a defined threshold fell outside and was subject to a separate slow-mover buyback option. That structure prevented the peg from locking in a distorted level while avoiding a fire sale.
A managed IT services provider in London, Ontario. Deferred revenue was significant due to annual prepaid contracts. The buyer, searching buying a business in London Ontario, almost missed that deferred revenue was in current liabilities on the trial balance. They moved it to the debt-like schedule, set the peg on receivables and payables only, and improved the equity price by the amount of deferred revenue at close. They also built a payroll accrual test so the team delivering the service had their costs correctly reflected. When I see buyers new to businesses for sale London Ontario or business for sale in London, Ontario, that deferred revenue shift is the single most common and most costly miss.
A D2C ecommerce brand using third party logistics. Negative working capital due to fast checkout and slower supplier terms looked attractive, but the brand’s returns rate spiked after promotions. Post-close, returns for pre-close orders hit the buyer’s cash. We solved this by adjusting the peg upward to cover expected returns and adding a split of return costs for 45 days after close. The seller kept upside on lower than expected returns through a simple collar mechanic.
Bridging UK and Canadian practices without confusion
If you are comparing opportunities in both Londons, terminology differs but the economic logic is similar. UK SPAs standardise completion account processes, and VAT is in scope. Canadian share purchase agreements often mirror the UK structure, with GST/HST rather than VAT. One practical difference shows up in payroll accruals and holiday pay. UK businesses carry statutory holiday accruals that sit invisibly high in Q2 and Q3. In Canada, vacation accruals are similar but handled differently in some small businesses. Ask to see the accrual roll-forward for the last 12 months to avoid sudden jumps around bank holidays or fiscal year end.
Currency also complicates multi-jurisdiction deals. If the business buys in USD and sells in GBP or CAD, translate working capital at consistent rates. Inventories purchased in dollars at varying rates can inflate peg calculations if you do not normalise. Do not let a strengthening dollar during diligence hand one side an unearned win.
Where brokers fit, and how to use them well
Good brokers reduce friction on pegs by preparing the ground. A well run process from a firm with experience in small business for sale London or business for sale in London will surface the working capital profile early. In London, Ontario, I have seen business brokers London Ontario do the same, giving buyers a monthly working capital schedule in the data room. If you are talking to an intermediary who regularly lists companies for sale London or circulates an off market business for sale, ask for a sample peg calculation and their proposed definition. It signals professionalism.
You will also see buyers and sellers name-check firms like Liquid Sunset Business Brokers or Sunset Business Brokers when they compare experiences. Regardless of brand, judge the broker by the quality of financial prep, not by the sales deck. A sober one page memo that explains the peg basis and calls out the tricky bits beats glossy marketing every time.
Planning for day one: avoiding the cash dip
Even a well set peg will not save a buyer who forgets that payroll comes every two weeks and suppliers expect payment by Friday. Build a 13 week cash flow that starts at completion. Plug in real receivable collection curves, not averages. If the seller has a habit of paying certain suppliers on the 28th, and you complete on the 27th, negotiate a one-time par on those payments in the completion mechanics. I have asked sellers to run an extra week of payroll pre-close if completion falls two days before payday, with a simple adjustment in the accounts.
On the seller side, do not starve the business in the final month by delaying routine stock purchases or squeezing payables unrealistically. Buyers can see the footprints in bank statements. Over-aggressive pre-close cash hoarding usually boomerangs into a higher peg request or tougher inventory quality tests.
Red flags that deserve a pause
Two patterns give me pause every time. First, any business with high receivables that refuses to provide a detailed aging with customer names and dispute notes. Second, inventory counts that rely on spreadsheets with perfect round numbers and no variance history. Both are fixable with openness and time. Both can hide 3 to 8 percent swings in working capital that will land in your lap right after closing.
Another watchout is rapid changes in terms. If the seller offered 90 day terms to a key customer in the last quarter to juice sales, bake that into the peg and the price. Equally, if a supplier cut terms from 60 days to 30 days, payables will shrink and working capital needs will jump. The peg must rise, or the buyer will fund the gap on day one.
Bringing it together when you sign
A clean working capital section in the SPA has three parts. First, a precise definition of each included and excluded line item, with example schedules from a recent month. Second, the peg amount and the basis for it, plus any normalisations. Third, the completion accounts process with a timeline, tie-out rules, and an expert determination clause if the parties disagree. If you are using a locked box instead, you will not have a peg true-up, but you still need a clear leakage definition and a conservative interest or ticking fee to protect value.
Keep the tone practical. If you are a buyer, your goal is not to win small business broker an accounting debate. Your goal is to take over a business that can meet payroll, pay suppliers, and serve customers without drama. If you are a seller, you want to be paid fairly for what you built, not to leave behind a cushion that the buyer never values. Good pegs serve both goals.
If your search right now reads buying a business in London or buy a business London Ontario, tuck this into your early checklist. Ask how the seller thinks about working capital, ask to see 12 to 24 months of data, and talk through seasonality. It is a short conversation that prevents a lot of long ones later.
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