Working Capital in LOI?

August 10, 2025

by a searcher from The University of Georgia - Terry College of Business in Denver, CO, USA

Hello! First time poster and preparing to present an LOI this week for a distribution business. I have a few questions as we're structuring the offer in regards to working capital: - How do you calculate the right amount of working capital to request in the LOI for a smooth first 90 days? - Do most deals you’ve seen include a working capital peg or target in the LOI? If so, how is it determined? - How do you define “normalized” working capital, and what adjustments do you push for before closing?

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Reply by a searcher
from University of Guelph in Toronto, ON, Canada

Prefer not to include the peg in the LOI but instead the methodology for how we will calculate it.

Reply by a lender
from University of Southern California in Los Angeles, CA, USA

Hi ^redacted‌ - We help a lot of clients get SBA loans and deals financed via the SBA program. 1. Calculating the right amount for first 90 days Start by projecting your first three months of operating expenses (payroll, rent, utilities, insurance, debt service) and expected cost of goods sold based on forecasted sales. Subtract projected customer collections during the same period to determine the net cash need. 2. Including a working capital peg/target in the LOI Yes, most deals include a “working capital peg” in the LOI. The peg is typically set equal to the company’s normalized working capital, calculated as the trailing 12-month average current assets (excluding cash) minus current liabilities (excluding debt). Alternatively, it could be the average of AR - AP over a trailing 12-month average. This ensures the business is delivered with the same liquidity it historically required to operate. The LOI can specify that the final working capital delivered at closing. The seller will deliver the business with at least the net working capital peg promised in the LOI. If AR - AP is too low, then the purchase price will go down to account for the business being sold with a smaller than agreed on “working capital peg”. 3. Defining and adjusting “normalized” working capital “Normalized” means adjusting historical working capital for seasonality, one-time events, and any unusual timing of payables or receivables. Before closing, you’ll want to: remove excess or obsolete inventory, normalize for seasonal swings and accrued expenses and payables reflect normal/standard vendor terms. The LOI should outline the peg conceptually, but the exact calculation and adjustments are finalized during due diligence so neither side is surprised at closing. We would love to help you find the right SBA lender for this deal. We work with all the major SBA lenders. The bank pay us after your loan closes, so this is a 100% free service for you. You can email me at redacted

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