Working Capital Peg in Home Care M&A: How It Works and Why It Matters

The working capital peg is one of the most consistently disputed elements of home care M&A — and for first-time sellers, one of the most commonly underestimated. Working capital adjustments routinely move 1%–3% of purchase price in the 90–120 days after close. In contested cases, the move can be larger.

This guide explains how the working capital peg works, why home care creates particular complexity, and how sellers protect themselves.

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The Concept

The buyer is paying for a business that requires a certain amount of working capital to operate. The buyer wants the business delivered with sufficient working capital to continue operations without injecting incremental capital. The seller wants to extract any “excess” working capital and not deliver more than is operationally required.

The working capital peg is the agreed normalized level of net working capital required at close. The mechanism:

1. Both parties agree on a peg value at LOI / purchase agreement
2. Buyer estimates actual working capital at close (estimated closing balance sheet)
3. After close, final working capital is determined (typically 60–90 days)
4. Difference between final WC and peg is paid to or by seller

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Components of Working Capital

Typical Inclusions

Current Assets:

• Accounts receivable (net of reserves)
• Inventory (rare in home care; relevant for DME)
• Prepaid expenses
• Other current assets

Current Liabilities:

• Accounts payable
• Accrued payroll and benefits
• Accrued expenses
• Deferred revenue
• Other current liabilities

Typical Exclusions

• Cash and cash equivalents (treated separately as “delivered cash”)
• Debt and debt-like items (treated separately)
• Tax-related items (handled separately)
• Specifically negotiated exclusions

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How the Peg Is Calculated

The peg is typically based on a trailing 12-month average of normalized net working capital. Some deals use trailing 6 or 24 months. The peg is intended to represent the “normal” level required to operate the business.

Normalization adjustments commonly include:

• One-time AR or AP items
• Seasonal variations
• Acquisition impacts
• Significant payer mix changes
• Unusual reserve releases

The methodology is usually negotiated at LOI and finalized in the purchase agreement.

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Healthcare-Specific Working Capital Issues

Accounts Receivable Aging

Home care AR has long and variable collection cycles:

• Medicare: 30–60 days typical
• Medicaid FFS: 30–90 days typical
• Medicaid managed care / MLTSS: 60–120+ days typical
• Commercial insurance: 30–90 days typical
• Private pay: 0–60 days typical

Aged AR (90+ days, 120+ days) is the most common WC dispute area. Buyers want to discount aged AR; sellers want to value at face.

Common compromise structures:

• Aging-based reserve (e.g., 100% of 0–90 day AR; 80% of 91–120; 50% of 121–180; 0% of 180+)
• Specific reserves for identified problem accounts
• “Lockbox” or true-up mechanism for specific aged accounts
• Carve-out of identified aged accounts from peg calculation

Recoupment Reserves

Medicare and Medicaid recoupment exposure (RAC, ZPIC, UPIC, MAC) creates contingent liability that is typically treated separately from working capital — but sometimes negotiated as a working capital reserve.

Denials Reserves

Pending denials and appeals generate contingent collectability questions. Reserves are often debated.

CMS Cost Report Settlements

For Medicare-certified home health and hospice, CMS cost report settlements create receivables and payables that may or may not be in working capital depending on negotiation.

Payer Mix Shifts

If payer mix has shifted materially in the trailing period, the WC peg should be normalized for the post-close payer mix expected to operate the business.

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The Estimated vs. Final Process

At Close

• Seller delivers estimated closing balance sheet
• Buyer pays purchase price based on estimated working capital vs. peg
• Working capital escrow funded (typically 0.5%–2% of purchase price)

60–90 Days Post-Close

• Buyer prepares final closing balance sheet
• Seller reviews
• Disputes negotiated

90–120 Days Post-Close

• Final working capital determined
• True-up payment made (from escrow if shortfall, by buyer if surplus)
• Working capital escrow released

Dispute Resolution

If parties cannot agree, typically:

• Defined dispute resolution period
• Escalation to neutral accounting firm
• Final binding determination

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Common Negotiation Levers

Peg Methodology

Trailing 12 months is standard but not required. For seasonal businesses or during atypical periods, alternative time periods may be negotiated.

AR Aging Treatment

The single most-negotiated element. Sellers should establish AR aging methodology at LOI rather than leaving for purchase agreement.

Collars

A collar reduces small post-close adjustments. Common structure: no adjustment if final WC is within +/- 1%–2% of peg.

Caps

Some deals cap the maximum WC adjustment in either direction. Less common but useful in highly variable working capital environments.

Specific Carve-Outs

Identified problem accounts, pre-close audit-related items, or unusual one-time items may be carved out and handled separately.

Working Capital Escrow Size

Escrow size should reflect realistic adjustment risk, not artificially inflated buffer.

Dispute Resolution Mechanics

Clear escalation timing, neutral arbiter selection process, and binding determination prevent post-close disputes from becoming protracted.

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Common Seller Mistakes

1. Accepting buyer-prepared peg without independent analysis. Sell-side QoE should include detailed working capital normalization.

2. Vague AR aging methodology. This is where most disputes arise. Methodology must be precise.

3. Underestimating Medicaid managed care AR collection cycles. Long DSO requires careful peg construction.

4. Not addressing recoupment and audit reserves. These contingent items often surface post-close.

5. Inadequate escrow sizing. Both directions matter — too-small escrow leaves seller exposed; too-large escrow ties up unnecessary capital.

6. Vague dispute resolution. Define timelines, arbiter selection, and binding mechanics.

7. Not coordinating with QoE. Working capital peg and QoE work must align — the same numbers should support both.

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How Hendon Partners Helps

Hendon Partners coordinates working capital peg construction with sell-side QoE work to ensure the peg defended at LOI is the same peg defended at post-close true-up. The agency owners we represent typically extract meaningful value through disciplined working capital negotiation that buyers expect to win by default.

Schedule a confidential conversation about your deal structure →

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Hendon Partners is a sell-side only home care M&A advisory firm.