Picture selling your company and, at closing, handing the buyer two years of profit you already earned. That’s what the standard working capital peg does in a healthcare deal where the practice gets paid two years after it delivers care. The standard: set the peg at average net working capital over the trailing twelve months, and close cash-free, debt-free. The seller keeps the cash. The receivables go with the business. In a 45-day business, the receivable holds six weeks of margin and nobody argues. At two years, it holds two years of profit. So is that receivable working capital or not? Half of it is. It’s one balance with two layers. The funded cost layer is cash already spent on care not yet paid for. The buyer needs it, so it belongs in the peg. The earned margin layer is profit on care delivered before close. It funds nothing. The seller already created it, and the seller often pays tax on it at ordinary rates, depending on the structure. The test: if the practice got paid in 45 days, that margin would already be cash. And the seller keeps the cash. Same economics, different timing. That doesn’t mean throwing out the standard. We apply the trailing twelve-month average to the funded cost layer only and price the margin layer separately. Notice the pattern? Collection time and profit move together. The margin layer runs about one turn of EBITDA for every year it takes to collect. Clean argument, except buyers have a good comeback: “I’m paying you 10x EBITDA. Now you want me to pay for the receivables too?” The multiple buys earnings after close. The receivable margin was earned before it. At two turns, a 10x bid that takes the receivable is closer to an 8x bid for the business. If you’re the buyer, getting this right helps you too. Ask early whether your multiple already includes the receivable, before it turns into a fight late in the deal. Pay for the margin as it collects, and it takes no capital on day one. Watch the true-up: on a growing book, a trailing-average peg usually comes in low, so expect to owe the seller money after closing. Buying or selling, what does your peg assume? #QualityOfEarnings #WorkingCapital #MergersAndAcquisitions