Working capital pegs in med spa deals: define the accounts before the number

A med spa working-capital peg is a negotiated target for the defined operating balances delivered at closing. Its usefulness depends on included accounts, exclusions, accounting policies, timing, and true-up rights. Reconcile membership obligations and cash separately, use consistent methods for target and closing balances, and prevent one liability from being deducted through several mechanisms.

What problem is a working-capital target meant to solve?

The buyer needs a functioning operation with the agreed resources and obligations, while the seller needs a clear account of what is included in consideration. Without a defined mechanism, changes in inventory, payables, accruals, or other balances can shift value unexpectedly around closing.

Mike Adhikari’s October 2024 working-capital presentation distinguishes transaction working capital from accounting totals and acquisition financing reserves. It is educational transaction commentary, not a universal contract. The actual agreement determines the accounts, calculation, adjustment, and exceptions for the med spa transaction.

A working-capital peg is the agreed target amount of defined operating net working capital against which a closing balance is compared. It should not be confused with the buyer’s financing reserve or a textbook total of every current asset minus every current liability. Define each purpose separately.

Which med spa accounts should be discussed?

Review receivables, inventory, prepaid operating expenses, trade payables, accrued expenses, membership or package obligations, refunds, gift cards, taxes, cash, and debt. Inclusion is a transaction question. List exact ledger accounts and treatment rather than relying on a phrase such as normal working capital.

A cash-pay practice may have limited receivables but significant prepaid services. That does not eliminate working-capital needs. Payroll, inventory, refunds, and redemptions can require cash even when customers usually pay promptly. The operating forecast and purchase mechanics should tell a consistent story.

Separate ordinary operating items from seller-specific, transaction, financing, and excluded liabilities. Have the accountant and counsel reconcile the categories. An item should not move among working capital, debt-like deductions, and separate adjustments depending on which presentation benefits one party at the moment.

How do you establish a supportable normal level?

Review monthly balances over relevant periods and explain seasonality, growth, provider changes, promotions, purchasing patterns, and unusual items. A simple historical average may be informative but can misrepresent a changed or seasonal operation. State the method and why it fits the business being transferred.

IRS recordkeeping guidance emphasizes the source documents behind transactions. For peg analysis, reconcile balance-sheet accounts to inventory, payables, accruals, member ledgers, and other support. An average of unreliable balances does not become reliable through additional decimal places.

Use the same account scope and policies in the target and closing calculations. If the buyer intends a different accounting treatment, resolve the hierarchy explicitly before signing. Keep the reference schedule so both parties can reproduce the negotiated baseline rather than reconstructing its meaning after closing.

How should deferred membership revenue be addressed?

Reconcile collections, earned revenue, unused benefits, refunds, freezes, expirations, and adjustments under the appropriate policy. Distinguish credit face value, booked liability, legal promise, and expected fulfillment cash. They can differ, and the negotiation needs to identify which measure it uses.

FASB’s dated revenue-recognition educational Q&A addresses customer-contract and recognition questions. Have the accountant apply current authoritative requirements and the actual membership promises. A software balance or management estimate does not alone establish the accounting liability or the correct negotiated transfer amount.

Decide whether obligations are included in the peg, treated separately, supported by retained cash, or handled through another defined arrangement. Then check the entire closing bridge for duplication. A buyer should not deduct the same obligation in working capital and again as a separate price reduction without a distinct supported reason.

What does a simple closing adjustment look like?

The following invented example assumes a dollar-for-dollar adjustment with no collar, cap, exception, or dispute. Actual documents may use different mechanics. The target and closing number must be calculated on the same agreed basis before subtracting them.

A negative peg can also be coherent in a particular business and agreement. The issue is the operation and defined balances, not whether the target looks intuitively positive. Ask the accountant to explain the cash consequences and make sure the buyer still has a funded operating plan.

How do you avoid confusing the peg with extra funding?

The buyer’s loan or equity may include a working reserve to fund payroll, purchases, or volatility. That reserve is a funding source for the acquisition model; the peg is a contractual measurement of delivered balances. They need coordination but are not automatically the same number.

Build a post-closing cash forecast using the actual delivered assets, assumed obligations, available cash, new financing, and scheduled payments. If the seller keeps cash while the buyer assumes prepaid work, show how the service cost is funded. A favorable adjustment does not help immediate liquidity unless its payment timing is understood.

Consider inventory usability, payable timing, accrued labor, and refunds. Book balances may differ from cash needed soon after closing. The forecast should expose those timing effects rather than assume a normal net balance guarantees adequate daily cash.

Which drafting and review details prevent disputes?

Specify included accounts, excluded items, valuation policies, cutoff, accounting hierarchy, estimates, physical counts, and treatment of later entries for earlier activity. Include an illustrative calculation tied to the actual ledger. Counsel should align the language with the accountant’s method.

Define preparation, delivery, inspection, objection, response, and dispute rights with actual deadlines in the agreement. Identify who has access to records after closing and how unresolved amounts are paid or held. A seller cannot test a calculation it is unable to inspect.

Coordinate the peg with debt, cash, transaction expenses, indemnities, escrow, and separate adjustments. The same underlying item can appear in several schedules accidentally. Maintain one classification register so the closing statement reflects the commercial agreement rather than a collection of inconsistent adviser spreadsheets.

What should both parties do before accepting the mechanism?

Run a sample closing with recent actual balances and a second scenario containing a material membership redemption or inventory change. Explain every line and cash effect. A mechanism that cannot be reproduced before signing is unlikely to become clearer during a post-closing disagreement.

1. Define the transferred operation and accounts.
2. Reconcile source balances and policies.
3. Normalize the target and document assumptions.
4. Agree prepaid-obligation and cash treatment.
5. Test the closing calculation and funding model.
6. Finalize review, payment, and dispute procedures.

Use the valuation hub, membership obligation guide, offer comparison guide, and Offer-to-Proceeds Bridge for context. The peg should make the economic handover understandable, with a calculation and cash plan the parties can test rather than an undefined promise about normal balances.

Preserve the closing snapshot and supporting exports. If a post-closing entry changes an earlier balance, retain the reason, source, and applicable cutoff treatment. This helps distinguish an ordinary accounting update from a contractual disagreement. A disciplined record can reduce the cost of resolving a dispute even when the parties reasonably disagree about an item.

How should unusual pre-closing activity affect the analysis?

Review material changes in purchasing, supplier payments, package promotions, refunds, accruals, and collections before closing. Such activity may have a valid operating reason, but it can change the balance delivered relative to the historical target. Explain the business purpose and contractual treatment rather than assuming every movement is ordinary or manipulative.

For example, a large prepaid-service campaign can increase cash while also increasing work owed. An inventory purchase can reduce cash and increase stock or payables. The target, closing calculation, and cash forecast should use consistent definitions so the economics remain visible. Counsel should address ordinary-course obligations and consent requirements in the actual agreement, with the accountant identifying the measurable financial effects.

Educational analysis prepared with AI-assisted research for The Med Spa Broker. “Last reviewed” records the source and editorial check date; it does not imply review by an attorney, clinician, or independent appraiser. Read our editorial standards.