"Walk me through how a working capital peg affects the purchase price" is a question that separates candidates who've memorized the EV-to-equity bridge from candidates who actually understand deal mechanics. Here's how to structure the answer.

Step 1: State the Two-Part Structure Up Front

The strongest way to open is to make clear there are two separate adjustments happening, not one. First, the standard bridge from enterprise value to equity value (subtract debt, add cash). Second, a working capital true-up layered on top, comparing actual closing working capital to the agreed peg. Interviewers are listening for whether you keep these two mechanics distinct, since candidates frequently blend them together and produce the wrong number.

Step 2: Explain the Direction of the Adjustment Correctly

This is where most candidates lose points under pressure. The rule is simple but easy to invert in the moment:

  • Actual working capital below the peg → purchase price goes down (the seller left less operating cushion than promised).
  • Actual working capital above the peg → purchase price goes up (the seller left more than promised, and gets compensated).

A useful way to keep this straight out loud: the buyer is paying for a business that can run itself on day one. Any shortfall versus the promised "normal" level of working capital is cash the buyer now has to put in themselves — so the price comes down to reflect that.

Step 3: Walk Through a Numeric Example

Interviewers almost always want to see the mechanic applied to numbers, not just described conceptually. A clean way to demonstrate it: take an agreed enterprise value, back into equity value using the standard debt and cash adjustments, then apply the working capital true-up as a final step. Working Capital Peg in M&A walks through exactly this sequence with a full worked example — enterprise value of $500.0m, a working capital peg of $40.0m against actual closing working capital of $32.0m, producing an $8.0m downward adjustment to the final purchase price.

Step 4: Anticipate the Follow-Up Questions

Once you've walked through the mechanic, interviewers often push into the messier real-world details: what happens if the buyer and seller disagree on the actual working capital figure (most agreements route this to an independent accounting firm), or how a working capital collar — a band around the peg within which no adjustment applies at all — changes the incentives for both sides. Being able to speak to these extensions signals you understand the mechanism, not just the formula.

How This Fits Into the Bigger Purchase Price Picture

The working capital true-up is one piece of a larger set of purchase price adjustments that also includes items like purchase price allocation after closing and the broader enterprise-to-equity bridge. If a case or interview question mentions a "peg," a "true-up," or a "collar," it's almost always testing this exact mechanic — practice it until the direction of the adjustment is automatic, not something you have to reason through live.