Series 79 practice questionmediumFinancial due diligence – working capital peg
During an M&A negotiation, the parties agree on a working capital 'peg' of $5 million. At closing, actual working capital is $4 million. What is the TYPICAL consequence?
- AThe purchase price is reduced by $1 million✓ Correct answer
- BThe seller receives a $1 million bonus
- CNo adjustment is made, as the peg is non-binding
- DThe buyer pays an additional $1 million
Explanation
Why A — The purchase price is reduced by $1 million
If actual working capital is below the agreed-upon peg, the purchase price is reduced by the shortfall. The peg is typically binding, and no bonus or extra payment is warranted for a shortfall.
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