Most HVAC sellers sign the LOI thinking they know the number. They negotiated hard on the EBITDA multiple. They pushed back on the earn-out percentage. They got the headline to where they wanted it. The working capital peg is the mechanism that quietly lowers it at the closing table — after all the major negotiations are done, after the advisors have moved on to other files, and after you've mentally already spent the money.
The headline price is $9M. The cash wired on day one is $8.6M. That $400K gap wasn't a surprise to the buyer. It was built into the deal structure from the start. The working capital peg is how it got there — and most HVAC sellers don't see it coming until it's already settled.
What Is a Working Capital Peg?
Three things to understand before you negotiate any working capital clause in your LOI.
The definition
Working capital = current assets minus current liabilities. Current assets include accounts receivable, inventory, and prepaid expenses. Current liabilities include accounts payable and accrued expenses. The "peg" is the agreed-upon target level of working capital the seller must deliver at close. Deliver more than the target, you receive a bonus. Deliver less, they deduct it from your cash at close — dollar for dollar.
Why it exists
The buyer needs the business to have enough liquidity to operate day one without injecting new cash. The peg sets that baseline — a reasonable mechanism in theory. The buyer shouldn't have to fund operations the moment they take the keys. Sounds fair. The problem isn't the concept. The problem is how the baseline is set.
The mechanics
Dollar-for-dollar adjustment. You're short $150K on close day — they wire $150K less. You're $200K above target — you get an extra $200K. But because PE firms set the target, the "neutral" outcome almost never is. The target isn't set at what's fair to both sides — it's set based on a reference period the buyer's team selects, often from the months that make your working capital look highest.
How PE Buyers Set the Target Strategically
PE firms propose a “normalized” working capital target based on trailing 12-month averages. For most businesses, this is a reasonable methodology. For HVAC businesses — which are inherently seasonal — it is lethal.
Here's the mechanics of how it works against you: if they use trailing months that include your peak summer AC install season or peak winter furnace season, they're anchoring the target at your highest-receivable months. On a July close, your current A/R is $950K. They set the target at $920K (average of the trailing 12 months, including two peak summers). You close in mid-July when the season is just starting to normalize — and come in at $870K. That's $50K off the wire, right there, before anyone disputes anything.
Not huge in isolation. But this same seasonal distortion affects inventory (stocked up for summer), prepaid expenses (annual maintenance agreements renewed in spring), and the timing of the settlement window. Add it up across every current asset line and a seasonal HVAC business regularly loses $150K–$400K to working capital settlement. On a $5M–$10M deal, that's a meaningful percentage of your cash at close.
Watch for
Any reference to “trailing 12-month average” in the working capital definition clause. That's the mechanism. You want a peg based on a normalized off-peak period, or a point-in-time date you agree on in advance. The reference period is the variable that determines whether your target is set at your peak or your trough.
The Post-Close Settlement Window
Working capital isn't settled at close — it's settled 60–90 days after close, based on audited financials. This means: (1) you wire the business to the buyer, (2) they run it for 60–90 days, (3) they calculate whether you “owed” them a working capital adjustment. In the meantime, they control the data and the accounting. Their CPA does the calculation. The burden is on you to dispute it.
This is why working capital language — the definition of current assets, the reference period, the collar, and the dispute resolution process — must be locked in the LOI, not negotiated at closing. By the time you're at the closing table, the leverage to change any of this is gone.
The Three Terms That Control the Outcome
Negotiate these three terms in the LOI and you've protected the majority of your working capital exposure. Leave them vague and you've handed the buyer a post-close adjustment lever.
The reference period
Trailing 12 months? Last 6 months? Point-in-time? Seasonal average? This single variable determines whether your target is set at your peak or your trough. For HVAC businesses, this is the most consequential term in the entire working capital definition. Push for a normalized period that excludes seasonal outliers, or a fixed point-in-time date agreed upon in advance during the off-season.
The collar
The collar is the dead zone — the range above and below target where no adjustment is made. A ±$50K collar on a $500K target means every dollar below $450K gets clawed back. A ±$150K collar protects you against $150K of shortfall before any deduction begins. A tight collar means every dollar of shortfall below the threshold gets clawed back. Push for a wide collar — at minimum ±$100K, ideally ±$200K on deals above $5M.
The dispute resolution mechanism
Who calculates the final number? Who is the "neutral" accountant if there's a dispute? What accounting standard applies — GAAP, or HVAC-industry-specific treatment of service agreements as deferred revenue? If you don't specify, the buyer's CPA does the calculation and the burden of disputing it falls on you. Push to name your own CPA as the preparer of the closing balance sheet, with a named neutral arbitrator if the parties disagree.
Before you enter a deal process, know your EBITDA baseline and PE Readiness Score.
Your negotiating position on working capital depends on how strong your fundamentals are. HVAC owners with high PE Readiness Scores have leverage to push for seller-friendly working capital terms. Get both numbers free.
Get Your EBITDA Baseline & PE Readiness Score →Negotiating the Peg Before It's Set in Stone
Everything above is negotiable at LOI stage. It is essentially non-negotiable once the purchase agreement is drafted. By that point, advisors on both sides have spent 200+ hours on the deal and no one wants to re-litigate working capital mechanics. The time to push is when the LOI is a term sheet, not a contract.
Three concrete moves to make before you sign:
Propose your own reference period
Counter any trailing 12-month proposal with trailing 6 months from an agreed off-peak date. Name the specific months. The buyer's first offer will use whatever period produces the highest target — your counter should use whatever period reflects normalized off-season working capital. This is a negotiation, not a calculation.
Push for a wide collar
For a $5M–$10M deal, push for a ±$150K–$200K collar. This is the dead zone where no adjustment is made regardless of where working capital lands. A wide collar protects you against the normal fluctuation of a seasonal business — and against accounting differences that emerge in the post-close audit.
Insist on your CPA as preparer of the closing balance sheet
The default in most PE deal structures is that the buyer's accountants prepare the closing balance sheet used to calculate the working capital adjustment. Push back. Insist that your CPA prepares the initial calculation, and name a specific neutral arbitrator in the LOI for disputes. Who holds the pen matters enormously in a post-close true-up.
Frequently Asked Questions
What is a working capital peg in an HVAC business sale?
A working capital peg is the agreed-upon target level of working capital (current assets minus current liabilities) that a seller must deliver at close. If your actual working capital at closing falls below the peg, the shortfall is deducted dollar-for-dollar from your cash at close. If you deliver more than the target, you receive a bonus. The peg is settled 60–90 days after close based on audited financials, not on closing day.
Can I negotiate the working capital peg?
Yes — but only at the LOI stage. Once the purchase agreement is drafted, both sides have invested 200+ hours in the deal and re-litigating working capital mechanics is effectively off the table. Push for a favorable reference period, a wide collar, and your CPA as the preparer of the closing balance sheet before you sign the LOI. A good M&A advisor will flag this as a priority negotiation item.
What happens if I come in below the working capital target at close?
If your actual working capital at close is below the agreed peg, the difference is deducted dollar-for-dollar from your cash at close. This isn't settled on closing day — it's calculated in the post-close true-up period (typically 60–90 days post-close), based on audited financials prepared by the buyer's CPA. The burden of disputing that calculation falls on you.
OffRamp is a free valuation tool for HVAC business owners. We don't sell your information, represent buyers, or work on commission. The calculator and reports are educational tools — always consult a licensed M&A advisor before entering a sale process.