A share purchase agreement sets a working capital peg at the twelve-month average of Rs 120 crore. Closing working capital comes in at Rs 95 crore after a seasonal low. What price adjustment applies, and why might each side argue for a different peg?

Under the agreement the price falls by Rs 25 crore, the gap between Rs 95 crore at closing and the Rs 120 crore peg. A same-month peg, last March's Rs 96 crore, would have cut it by Rs 1 crore; a three-month average of Rs 102.7 crore by Rs 7.7 crore. The twelve-month peg favours the buyer because the business needs Rs 120 crore on average and Rs 142 crore by August; the seller argues a March closing is naturally low and the price should not punish the calendar. The peg exists to stop either side moving value through timing.

When you buy a running shop you expect the shelves stocked and the customers' dues on the books, at the level the shop normally runs. If the owner clears the shelves and collects every rupee the week before handing over, you have paid for a shop and received a room. The working capital pegThe normal level of net working capital agreed in the purchase agreement. The price moves rupee for rupee with the difference between closing working capital and this level. fixes that normal level, and the price moves with the difference: Rs 95 crore delivered against Rs 120 crore agreed is a Rs 25 crore reduction. On a cash-free, debt-free deal the seller keeps the cash, so a low working capital month means the seller has already turned Rs 25 crore of receivables into cash it is taking home; the adjustment is what makes that fair.

The twelve-month average says the business needs Rs 120 crore to run through a typical year. The seller's seasonal pegs say March is always about Rs 96 crore and the buyer knew it. Both are internally consistent; the question is whether the enterprise value of Rs 900 crore was built on cash flows that assumed average working capital or March working capital. If the buyer's model used Rs 120 crore, the twelve-month peg matches the price and the seller should have negotiated a seasonal peg before signing, not after.

Because of what happens after closing. The buyer takes the keys on 1 April and must fund working capital from Rs 95 crore up to Rs 142 crore by August, Rs 47 crore of cash the business consumes before the festival-season receivables are collected in the new year. A seasonal peg would hand the seller the cash from the run-down and hand the buyer the bill for the build-up; the twelve-month peg splits the cycle fairly because, averaged over a year, the business holds Rs 120 crore. The seller's fair counter is not a March peg but a smaller point: if the Rs 900 crore was itself set on March cash flows, the seller is being charged twice, once in the price and once in the adjustment, and the buyer should show its model. The limit of all of this is that a peg assumes last year's seasonality repeats; a buyer who expects to change payment terms or stock policy is buying a different cycle and should say so in the agreement.