The short answer: Escrow holds back ~10 to 15% of the price with a neutral party to fund indemnity and true-up claims. An earnout pays part of the price later, only if the business hits targets, a fix for value gaps and concentration/owner-dependence risk. The working capital peg is the level of net working capital the seller must deliver at close (set from a 6 to 12 month average), trued up 60 to 90 days after closing. Together they turn a single price into a fair, risk-adjusted deal.
Why price isn't just price
A purchase price answers "how much." These three mechanisms answer the harder questions: when is it paid, what if the business isn't quite what it looked like, and how much cash comes with it on day one. They're negotiated in the purchase agreement and they routinely swing the real cost by six figures.
Buyers and sellers rarely fight over price alone. They trade price against working capital and earnout.
Escrow (the holdback)
At close, instead of the full price going to the seller, a slice, commonly 10 to 15%, is parked with a neutral escrow agent for a set period (often 12 to 18 months). If a seller representation turns out false, or the working capital comes in short, you draw from escrow instead of chasing the seller for a check. Whatever's left when the period ends goes to the seller. It's your safety net made liquid.
Escrow > a promise
An indemnity you have to sue to collect is worth far less than money already sitting in escrow. On any deal with real risk, negotiate for a meaningful holdback and a survival period long enough to surface problems.
Earnouts
An earnout defers part of the price and pays it only if the business hits agreed targets after close, revenue, gross profit, or a key customer staying. It's the classic bridge when you and the seller disagree on value or the future is uncertain. It's also a targeted answer to two red flags: tie the earnout to the concentrated customer renewing, or to the owner-dependent revenue holding up through transition.
- Aligns incentives, the seller has a reason to help you succeed post-close.
- Reduces your upfront risk, you pay full value only if the results are real.
- Watch the metric, define it precisely and pick something you control and can measure cleanly, or it becomes a dispute.
The working capital peg
A business needs a baseline of net working capital, receivables and inventory minus payables, just to open its doors Monday morning. If the seller strips the cash and collects the receivables on the way out, you'd have to inject your own money to keep operating, quietly raising your real price. The peg prevents that: it's the agreed target working capital the seller must deliver at close, typically set from an average of the trailing 6 to 12 months.
The post-closing true-up
You can't measure closing-date working capital on the closing date, so the deal includes a true-up, usually 60 to 90 days after close:
| At true-up… | Result |
|---|---|
| Actual WC above the peg | Buyer pays seller the surplus |
| Actual WC equals the peg | No adjustment |
| Actual WC below the peg | Price reduced / drawn from escrow |
The peg is a negotiation, not a formula
How the peg is calculated, which accounts count, cash vs cash-free, the averaging window, is negotiable and materially changes the number. Get your accountant to define it precisely in the agreement; a vague peg is a fight waiting to happen at true-up.
How they work together
Picture a $1,000,000 deal: the seller must deliver, say, a $120,000 working capital peg at close; $130,000 sits in escrow to cover indemnities and any true-up shortfall; and $100,000 of the price is an earnout paid over the next year if the top customer renews. The "price" was one number, but escrow, the peg, and the earnout decide what you truly pay and when. Model the whole structure, not just the headline, in the valuation calculator.
These live inside the purchase agreement
See how escrow, earnouts, and the peg connect to reps, warranties, and indemnification.
Frequently asked questions
The target level of net working capital the seller must deliver at close, usually set from a trailing 6 to 12 month average. It ensures the business has enough cash, receivables, and inventory to keep running so you don't have to inject extra cash. After close, actual working capital is trued up dollar-for-dollar against the peg.
Part of the price, commonly 10 to 15%, is held by a neutral third party for a set period after close. It funds indemnification claims if a rep proves false and often backs the working-capital true-up, so you can recover without suing. Whatever isn't claimed is released to the seller at the end.
A portion of the price paid later, only if the business hits agreed targets like revenue or profit after close. It bridges value gaps and manages customer-concentration or owner-dependence risk by tying part of the price to actual results.
The post-closing adjustment, usually 60 to 90 days after close, comparing actual net working capital at closing to the peg. Above the peg, the buyer pays the surplus; below it, the price is reduced or the shortfall is drawn from escrow.
Sources
- Working capital peg, true-up timing, and escrow prevalence, Morgan & Westfield, CT Acquisitions (2026).
- Escrow holdback ranges and earnout structure, Acquisition Stars, Chuhak & Tecson.
