# Working Capital Peg in Home Care M&A: How It Works and Why It Matters > The working capital peg is one of the most contested adjustments in home care M&A — and one of the most commonly misunderstood by first-time sellers. Here is how it works and how to negotiate it. Source: https://www.hendonpartners.com/insights/working-capital-peg-home-care-ma-explained Author: Neli Gertner Published: 2026-05-04 Category: Seller Guides Tags: working-capital, deal-structure, QoE, M&A ---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. --- ## 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 --- ## 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 --- ## 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. --- ## 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. --- ## 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 --- ## 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. --- ## 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. --- ## 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 →](/contact-us)** --- *Hendon Partners is a sell-side only home care M&A advisory firm.* --- ## Frequently Asked Questions ### What is the working capital peg? The working capital peg (also called the working capital target) is the amount of net working capital the seller is required to deliver to the buyer at closing. If actual closing working capital exceeds the peg, buyer pays seller the surplus. If actual is below the peg, seller pays buyer the shortfall (typically out of working capital escrow). ### How is the working capital peg calculated? The peg is typically based on a trailing 12-month average of normalized net working capital — current assets (excluding cash) less current liabilities (excluding debt). The exact methodology, what's included/excluded, and time period are all heavily negotiated. Healthcare deals require special attention to AR aging assumptions, recoupment reserves, and payer-mix adjustments. ### Why is working capital peg often disputed in home care? Home care AR has long collection cycles (60–120+ days for Medicaid managed care, 30–60 days for Medicare, longer for some commercial). Aged AR collectability is the most common dispute area. Buyers want to discount aged AR; sellers want to value at face. Reserves for denials and recoupment also generate disputes. ### What is a 'collar' on working capital? A collar (or band) is a range around the peg within which no adjustment occurs. For example, a $500K collar around a $5M peg means actual working capital between $4.5M and $5.5M produces no payment in either direction. Collars reduce post-close adjustment friction but require negotiation. ### How do sellers protect against working capital disputes? Sell-side Quality of Earnings work that includes detailed working capital normalization is the primary protection. Pre-LOI agreement on methodology, AR aging treatment, and reserve assumptions prevents post-close surprises. Sellers should also negotiate clear dispute resolution mechanics (escalation to neutral accountant, defined timelines).