Net Working Capital (NWC) Peg Calculation Guide for Texas Sellers
In a lower-middle-market Texas business sale ($1M–$50M enterprise value), the Net Working Capital (NWC) peg is the agreed baseline of non-cash current assets minus non-debt current liabilities that the seller must leave inside the business at closing so the buyer can fund payroll, inventory, and supplier bills on Day 1. In a standard "cash-free, debt-free" transaction, the seller keeps excess bank cash and pays off funded debt, while any shortfall between closing-day NWC and the 12-month trailing NWC peg reduces the seller's closing wire dollar-for-dollar.
1. Accounting NWC vs. Transaction (Cash-Free, Debt-Free) NWC
Many Texas business owners ask their CPA for "working capital" and hear the textbook GAAP formula (Total Current Assets minus Total Current Liabilities). In an M&A transaction or SBA 7(a) acquisition, the Letter of Intent (LOI) and Purchase Agreement use a narrower Transaction NWC formula that strips out cash and funded debt:
Included in Transaction NWC (Current Assets ex-Cash)
- Collectible Accounts Receivable (AR): Trade invoices aged under 90 days (plus collectible retainage on commercial construction jobs).
- Work-in-Process / Unbilled Revenue: Costs and earned margin in excess of billings (under-billings) on active jobs.
- Verified Usable Inventory: Salable parts, raw materials, and finished goods (excluding obsolete or uncounted stock).
- Prepaid Operating Expenses: Prepaid insurance, software subscriptions, and trade licenses that transfer to the buyer.
Deducted in Transaction NWC (Current Liabilities ex-Debt)
- Trade Accounts Payable (AP): Open vendor, subcontractor, and material supplier bills.
- Accrued Payroll, Bonuses & PTO: Wages earned through closing day, employer payroll taxes, and accrued employee vacation/bonuses.
- Deferred Revenue & Customer Deposits: Upfront customer deposits, progress billings in excess of costs (over-billings), and unearned annual maintenance/MSP contracts.
- Accrued Sales & Property Taxes: Unremitted Texas sales tax and pro-rated county personal property taxes.
2. Worked Example: 12-Month Trailing NWC Peg vs. Closing-Day True-Up ($6.5M Texas Contractor Sale)
Suppose a Houston or DFW commercial contractor signs an LOI at a $6,500,000 cash-free, debt-free purchase price. During the Quality of Earnings (QoE) review, the trailing 12-month (TTM) monthly accrual average establishes a $920,000 NWC peg. Look at how diligence adjustments to AR, WIP, and customer deposits create a $185,000 purchase price reduction at closing:
| Balance Sheet Line Item | 12-Month Trailing Average (Agreed Peg) | Seller's Unadjusted Closing Sheet | Buyer QoE / Diligence True-Up at Close | Why the Adjustment Happened |
|---|---|---|---|---|
| Accounts Receivable (Net) | $1,150,000 | $1,180,000 | $1,060,000 (-$120K) | QoE excluded $120,000 of disputed commercial invoices aged past 120 days. |
| Costs in Excess of Billings (WIP / Unbilled) | $190,000 | $160,000 | $160,000 | Verified against signed field tickets and job-cost schedules. |
| Inventory & Parts on Trucks | $240,000 | $250,000 | $215,000 (-$35K) | Physical inventory count wrote off $35,000 of obsolete parts sitting in the warehouse. |
| Prepaid Expenses | $45,000 | $40,000 | $40,000 | Transferable commercial auto and GL insurance policies pro-rated to close. |
| Total Non-Cash Current Assets | $1,625,000 | $1,630,000 | $1,475,000 | -$155,000 lower than seller's unadjusted books. |
| Less: Trade Accounts Payable | -$410,000 | -$395,000 | -$425,000 (-$30K) | Unrecorded subcontractor invoices for work completed prior to closing date. |
| Less: Accrued Payroll, Commissions & PTO | -$155,000 | -$110,000 | -$165,000 (-$55K) | Cash-basis seller had not accrued 8 days of earned field payroll and accrued vacation. |
| Less: Customer Deposits & Deferred Revenue | -$140,000 | -$60,000 | -$150,000 (-$90K) | 50% upfront equipment deposits collected in the final month before work began. |
| Net Working Capital (NWC) | $920,000 Peg | $1,065,000 Claimed | $735,000 Verified | -$185,000 NWC Shortfall vs. Peg |
| Headline Purchase Price Impact | $6,500,000 LOI | +$145,000 Expected | $6,315,000 Actual | -$185,000 dollar-for-dollar deduction at close |
The double-dip trap to watch for: Never let a buyer's QoE team deduct an item from trailing EBITDA (which reduces your purchase price at a 4x–5x multiple) and also treat the same item as a punitive adjustment in your Net Working Capital peg. For example, if upfront customer deposits are reclassified into deferred revenue to reduce trailing EBITDA, that same accrual methodology must be applied consistently across all 12 historical peg months so your target peg drops correspondingly.
3. Four Working Capital Traps for Texas Contractors, Manufacturers & MSPs
1. Seasonal Texas HVAC & Roofing Swings
A Texas HVAC or mechanical contractor builds peak Accounts Receivable and inventory in July and August, then drops to a seasonal trough in January. If your NWC peg is set at the 12-month average ($600K) and you close the sale in February when seasonal NWC naturally sits at $380K, you lose $220,000 at the closing table unless you negotiate a seasonally adjusted peg or collar.
2. Upfront Deposits & Annual Maintenance Agreements
In Texas MSPs and residential service companies that bill annual contracts upfront, cash hits the bank immediately—and the seller keeps pre-close cash—while the obligation to service those customers for the next 11 months stays with the buyer as a Deferred Revenue liability. Buyers typically require a dollar-for-dollar credit for unearned contract obligations.
3. Aggressive Pre-Close AR Collection ("Starving the Peg")
Some sellers try to "sweep the bank account" before closing by offering customers discounts to pay AR early, delaying vendor AP payments, or holding off on inventory reorders. Because NWC is trued up at closing, converting $100,000 of AR into $100,000 of bank cash reduces your closing NWC by $100,000—resulting in zero net gain and frayed buyer trust.
4. 10% Construction Retainage & Oilfield OpenInvoice Delays
In Texas commercial construction and oilfield services, 10% retainage or 60-to-90 day operator invoice approvals often sit past 90 days even when 100% collectible. Define in the LOI that contractual retainage and approved operator tickets under 120 days count as good AR in the NWC calculation.
Questions Texas Sellers Ask About the Net Working Capital Peg
What is a Net Working Capital (NWC) peg in a business sale?
A Net Working Capital peg is the target amount of non-cash current assets minus non-debt current liabilities that a seller agrees to deliver at closing so the business can operate normally without an immediate cash injection from the buyer. If actual NWC at closing is above the peg, the purchase price increases dollar-for-dollar; if actual NWC is below the peg, the purchase price is reduced dollar-for-dollar.
Who keeps the cash in the bank account in a cash-free, debt-free sale?
In a cash-free, debt-free transaction, the seller keeps excess cash in the company's bank accounts at closing and must pay off all bank loans, equipment notes, and lines of credit out of closing proceeds, provided that the agreed Net Working Capital peg (AR + inventory + prepaids minus AP and accrued liabilities) is delivered intact.
How is the 12-month trailing NWC peg calculated if I keep cash-basis books?
During due diligence, the buyer's Quality of Earnings (QoE) accountants reconstruct 12 monthly accrual balance sheets by mapping invoice dates, vendor bill dates, payroll periods, and job completion stages. Because buyer-reconstructed accrual sheets often penalize the seller, converting to clean monthly accrual accounting 12 to 24 months before going to market protects your closing wire.
What is the post-closing NWC true-up period?
Because exact closing-day AR, AP, and WIP balances cannot be finalized on the morning of closing, the seller delivers an Estimated Closing Statement at close, and the buyer has 60 to 90 days post-closing to prepare a Final Closing Balance Sheet. Any difference between the estimated NWC and final verified NWC is settled out of the working capital escrow holdback.
Do SBA 7(a) business sales use a Net Working Capital peg?
Smaller main-street SBA deals sometimes price inventory separately and let the seller keep AR and pay off AP, or include a specified amount of working capital loan proceeds inside the SBA 7(a) loan. However, larger SBA acquisitions ($2M to $5M+ enterprise value) and nearly all lower-middle-market deals use a formal NWC peg so the buyer does not run out of operating cash during the first 60 days.
How can SweetSpot help me protect my working capital before a sale?
SweetSpot is not a CPA firm or business broker. We work with Texas owners 6 to 24 months before an exit to tighten AR collection, clean up unbilled WIP and obsolete inventory, and establish clean monthly accrual tracking so you do not get blindsided by a working capital hair-cut under an LOI (see our published fixed fees).