Working Capital Pegs in an Ecommerce Sale

Most founders negotiate the headline number for months: the multiple, the EBITDA, the earnout. Then a single defined term buried in the purchase agreement, the working capital peg, quietly moves $300K to $600K of that headline number, and most sellers do not see it coming until the true-up lands 90 days after close.

I have been on both sides of this. The peg is not a trick, it is a normal part of every deal. But it is one of the most misunderstood, money-moving clauses in an ecommerce sale, and inventory-heavy DTC brands are the ones who get hurt most. Here is how it works and how to protect yourself.

Negotiating the peg with your numbers straight is exactly what a fractional CFO does in a deal.

What the working capital peg actually is

When a buyer pays you a multiple of EBITDA, they assume the business comes with enough working capital to keep running the day after close. They do not want to write the check and then immediately fund a $1.8M inventory rebuy out of their own pocket. So the deal sets a target, the peg, for how much net working capital you must leave in the business.

Net working capital here means the operational stuff: accounts receivable plus inventory minus accounts payable. Cash and debt are handled separately on a cash-free, debt-free basis. If you want the underlying definitions, see what is working capital and what is net working capital. The peg is simply the agreed normal level of that operational capital.

How the peg is set: a normalized average

The peg is almost never a single month. According to deal advisors including Baker Tilly and BDO, the standard starting point is a trailing 12-month average of net working capital, then normalized for seasonality, growth, one-time items, and obsolete inventory.

The trailing-12-month average exists for one reason: to stop either side from cherry-picking a convenient month. If a seller could peg on their lowest-inventory month, they would. If a buyer could peg on the peak pre-holiday inventory build, they would. The average smooths it out. But "average" hides a lot of judgment, and that judgment is where the money moves.

A worked true-up

Take a DTC brand with $300K AR, $2.4M inventory, and $900K AP. Net working capital is $1.8M, and the clean trailing 12-month average is also $1.8M. That is the right peg.

Now watch what a wrong peg does to the cash that hits the seller's account at close.

Read it scenario by scenario:

• Peg set too high at $2.4M. A buyer who anchors the peg on the peak inventory build forces you to leave $600K more in the business than it normally runs on. That is a straight $600K out of your proceeds.
• Peg set on a low-season month at $1.4M. If you can anchor it low, you keep $400K more. This is why buyers fight the peg hard.
• Brand delivers $1.5M against a $1.8M peg. You ran inventory lean into close, maybe to free up cash. The true-up claws back $300K dollar-for-dollar.
• Brand delivers $2.1M against a $1.8M peg. You over-bought before close. The buyer owes you the $300K, but only if the agreement is drafted to pay it, and only after the true-up settles.

The chart ranks the outcomes by size. The table below groups them by what actually drove the result, the peg you agreed versus the NWC you delivered, so you can see which lever moved the money:

Same business, same multiple, same EBITDA. The peg alone moves the outcome by up to $1M from best case to worst case. That is the gap between anchoring the peg on the peak inventory build and anchoring it on a low-season trough, and it is settled in cash you either keep or wire back.

Why inventory-heavy DTC brands carry the most risk

For an apparel, beauty, or food brand, inventory is usually the single biggest line in net working capital. As a share of annual revenue it tends to run in the low-to-mid double digits, roughly 15% to 25% for slow-turn beauty and apparel, and lower for faster-moving categories. The exact share matters less than the fact that it is the dominant, most-volatile piece of the number you are negotiating. Three things make it dangerous in a peg negotiation:

1. It swings. A seasonal build before Q4 can be double the trough. Which months feed the average changes the peg materially.
2. It is valued by judgment. Cost vs landed cost, obsolete and slow-moving stock, in-transit goods. A buyer's quality-of-earnings team will write down stale inventory and drop your delivered NWC, triggering a true-up against you.
3. It is easy to game, so buyers assume you will. Drain inventory before close to pull cash out and the peg mechanic catches it and reverses it. Sellers who try this just hand the buyer the upper hand. I have watched a beauty founder run inventory lean into close to free up cash, then wire a six-figure shortfall back when the true-up settled. The peg does not care about your timing.

What to do about it

Here is what I tell every founder 12 to 18 months before a sale. This is the same discipline we walk through in how ecommerce brands are valued.

1. Track net working capital monthly, starting now. You cannot argue a peg you have never measured. Twelve clean months of NWC is your negotiating position.
2. Build your own trailing 12-month average before the buyer hands you theirs. Know your number cold, including the seasonal shape, so you can spot a cherry-picked month instantly.
3. Clean up inventory early. Write down or sell through obsolete stock 12 months out, not during diligence, so it does not become the buyer's adjustment.
4. Negotiate the definition, not just the number. What counts as inventory, how obsolescence is treated, whether the peg is seasonality-adjusted. The definition moves more money than the headline peg.
5. Get the collar and true-up timing in writing. Confirm the true-up runs both ways, set the 60 to 90 day window, which can stretch to 120 days on more complex deals, and agree the accounting standard up front so there is no fight over methodology later.
6. Run the close like an ordinary month. Do not drain or stuff working capital. Deliver right at the peg and the true-up is a non-event, which is exactly what you want. For how this interacts with the rest of your deal structure, see structure to protect your earnout and prepare financials for due diligence.

Methodology

The cash-impact scenarios are an illustrative worked example built from a representative DTC balance sheet ($300K AR, $2.4M inventory, $900K AP, $1.8M NWC), applied to standard M&A working capital adjustment mechanics. The trailing-12-month-average peg convention and the dollar-for-dollar true-up reflect guidance from Baker Tilly and BDO and Eightx's own deal experience. NWC definitions are drawn from Eightx glossary pages on working capital and net working capital. The inventory-as-a-share-of-revenue range reflects DTC and CPG working-capital benchmarks from Wayflyer and CFO Pro Analytics. Figures are illustrative, not a forecast for any specific brand.

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