Working capital peg

Why it matters in a senior care sale

A care business may pay staff before it collects for their work. The parties need to agree on the net balance of specified operating accounts to be delivered at closing. A peg makes that price adjustment measurable when the account definitions are clear. Cash may be excluded from those accounts.

SBA lists working capital among possible uses of 7(a) funds. Its program guidance does not set a closing peg for every purchase. A lender's funding decision and the parties' price adjustment are separate matters. (Source: SBA)

How to read the account schedule

Check how the agreement treats unpaid invoices, trade bills, accrued payroll, prepaid costs and other balances. Flag debt, deposits and restricted funds for separate review where needed. Match each balance to the ledger and its supporting records.

IRS recordkeeping guidance supports tracing income and costs to their source. A balance on a spreadsheet still needs an explanation of what is owed and why. (Source: IRS)

Ask how the target was chosen. One date may fall just before payroll or just after a large receipt. Review a suitable run of periods and explain unusual items instead of choosing the date that favors one party.

Use the completion-account example to follow the target beyond its definition. A credit and missing payroll change the final balance. The workpaper keeps those changes separate from the adjustment already applied at closing.

An illustrative price adjustment

Assume a fictional agreement calls for $120,000 of working capital and the closing balance is $110,000 under the same rules. If the agreement uses a dollar-for-dollar adjustment, the $10,000 gap reduces the price. These amounts explain the mechanism, not a typical care-business target.

The buyer might still face a cash shortage before the next receipts arrive. A price adjustment does not show when cash reaches the bank. Use the working-capital guide to connect the terms with cash timing.

What to agree before closing

Document the allowance for doubtful receivables and the treatment of disputed invoices. A gross receivable balance can overstate the assets delivered if collection is doubtful. Use the agreed accounting policy consistently when calculating both the target and the final adjustment.

Name who prepares the estimate, what records support it and when the final balance will be checked. Define how the parties resolve disputes. Check the treatment of later credits and receipts from old invoices.

The buyer cash-forecast exercise follows a fictional buyer beyond the closing-account calculation. It corrects receipts kept by the seller and costs missing from the plan. This gives the reader a separate cash task without treating the result as a purchase-price adjustment.

A later price change may also affect tax reporting. Have the accountant review the applicable rules, including Form 8594 where relevant. The peg itself does not decide the tax result. (Source: IRS instructions)