Net working capital peg: a worked example on a data center sale

Working capital is current assets minus current liabilities. In a deal, net working capital keeps only the operating lines: receivables, prepayments, payables, accruals and deferred revenue, with cash, debt and debt-like items left out because the price deals with them separately. The purchase agreement sets a peg, the level of NWC the enterprise value assumes; the seller is paid more when closing NWC is above it and less when it is below.

This page sets that peg for Project Voltaic, the illustrative sale of Ironvale Digital Infrastructure, a data center operator with $412.0 million of FY25 revenue. The first-round process letter asks each bidder for “the level of net working capital assumed in your enterprise value, the methodology used to determine it, and any items you would expect to treat as indebtedness or debt-like items” (11.08, section 3(c)). The seller’s QoE proposes a peg of $(11.8) million. NWC here is negative, because tenants pay rent in advance and the company owes its utilities and contractors more than tenants owe it.

What the work found:

• The QoE’s table does not follow its own definition. Its section 8.1 puts accrued property taxes and tenant security deposits inside NWC; its table leaves both out. With them, December 2025 NWC is $(33.1) million, not $(12.5) million.
• Its “trailing twelve-month” peg rests on three balance sheets. The data room has no month-end balance sheets, and the three it has average $(11.7) million, which does not reproduce $(11.8) million.
• On the full definition and the seller’s own three dates, the peg is $(16.4) million. At an illustrative December 2026 closing that costs the buyer $0.5 million against the QoE’s peg. The seller’s likely counter, a growth-adjusted peg of $(22.4) million, would cost $5.9 million.
• $44.7 million of payables is outside NWC and off the seller’s debt-like list. The QoE excludes $57.6 million of payables and accruals from NWC but lists only $12.9 million of them as debt-like.

The quality of earnings work behind these numbers is on the financial due diligence page, and the earnings base on the adjusted EBITDA page. This page does not rebuild them.

What counts as working capital here

Five lines are working capital. Eight more sit on the balance sheet, four of them inside the payables caption, and stay outside it.

The test for each line is whether it turns over in the operating cycle and whether a normal level of it is already in the enterprise value. Receivables, prepayments, operating payables and current deferred revenue pass. So do accrued property taxes: the levy recurs every year, and about nine months of it is always accrued.

Four business-specific lines need a decision:

• Power pass-through receivables stay in. Metered power is rebilled to tenants at the utility rate, with no margin (2.08, section 3). The receivable is matched by the utility payable and moves with summer load. Its billing timing is a seasonal swing to normalise, not an item to exclude.
• Tenant security deposits stay out. They are refundable to tenants, and the cash behind them is not segregated on the balance sheet, so they follow the cash rather than the operating cycle.
• Accrued construction capex stays out. The audited caption is “accounts payable and accrued liabilities (incl. construction)”. Contractor invoices for PHX II and ATL II pay for assets, not for the operating cycle.
• Current deferred revenue stays in; non-current stays out. Rent billed in advance is replaced every month, so a normal level belongs in the peg. Install fees amortising beyond a year do not turn over in the cycle. The deferred revenue section sets out the choice.

How the balances outside NWC are treated in the price, as debt-like items or not, is on the financial due diligence page.

The QoE against its own definition

The QoE’s NWC reconciles to the balance sheet, but leaves out $20.6 million its own definition includes at December 2025.

The QoE’s table ties to the dollar at all three dates. Its proposed definition then lists accrued property taxes and tenant security deposits as included, and the table omits both. It also leaves out $2.6 million of receivables and $4.0 million of other current assets at December 2025 without explaining them. They are most likely other-income receivables and operating prepayments, so the buyer’s definition keeps them in NWC and asks about them in Phase II.

On the buyer’s definition NWC was $(15.1) million at December 2024 and $(17.1) million at both December 2025 and March 2026. The difference against the QoE is mostly definition, and a definition difference moves the peg and the closing balance together. The purchase agreement has to say which lines are in.

Where the payables go

The QoE keeps $57.6 million of payables and accruals out of NWC but lists only $12.9 million of them as debt-like. The other $44.7 million is in neither.

The $44.7 million includes the FY25 bonus, $9.4 million, paid in March 2026. The QoE’s operating payables rose only $0.8 million in a quarter when the bonus was paid, so they do not include it. The remaining $35.3 million is construction payables and other accruals; the data room does not break it down, so the first Phase II question is a breakdown of the caption. For the peg, all of it stays outside NWC, and the closing statement has to exclude the same balances.

NWC month by month

The data room has three balance sheets in the period, so the other 13 month ends are rebuilt from monthly drivers. They swing by $13.5 million.

The management accounts (2.05) say balance sheets are prepared only at quarter and year end, and the June and September 2025 quarter ends are not in the room. The QoE says management is still compiling monthly balances. To see the seasonality the peg has to absorb, each NWC line is driven month by month:

• Receivables: month-end open invoices from the invoice register (5.08), plus the balance outside the register, interpolated between actual dates.
• Power billing timing: power revenue by month (2.05) against power billed by month (3.07).
• Prepaids and operating payables: months of operating cost.
• Accrued property taxes: rolled forward from the 7.05 levy.
• Current deferred revenue: months of revenue.

The ratio on each line is measured at each actual balance sheet and interpolated between them, so the estimates return the actual balances in December 2024, December 2025 and March 2026.

Normalised NWC ranges from $(9.9) million to $(23.3) million. Most of that range is collection timing. Rent is invoiced on the 1st and due at month end, so a few days’ difference in when the large tenants pay moves several million of receivables across a month end. The rest comes from operating payables, which rise with summer utility bills.

Normalising for seasonality and one-offs

Power is billed evenly but consumed in summer, which moves NWC by $7.5 million between April and September. The QoE calls seasonality “modest” because it only looked at December and March.

Tenants are billed a flat monthly amount for power, and the consumption behind it peaks in July and August. Revenue follows consumption, so the company is over-billed by $4.1 million by April and under-billed by $3.4 million by September. The two net to nil every December, which is why neither year-end balance sheet shows it. The normalisation takes the billing timing out of every month, so the peg does not depend on which month the deal closes in.

Three other items are handled once, outside the monthly series:

• The bonus accrual builds to its December peak and is paid each March. It is outside NWC, so its March step does not move the peg.
• Accrued transaction costs, the litigation accrual and severance are one-offs outside the operating payables, so they are outside NWC too.
• The DFW I insurance recovery and the PHX I tax refund are adjusted out of EBITDA. No receivable for either shows at an actual balance sheet date, so neither is adjusted here.

A check in the workbook confirms that every balance is counted once: inside NWC or outside it.

Setting the peg

The seller’s own method on the full definition gives a peg of $(16.4) million. After the $2.0 million collar, a trailing 12-month average or the March 2026 balance would cost the buyer $2.4 million more, and a growth-adjusted peg $5.9 million more.

The selected peg averages the three balance sheets the QoE used, December 2024, December 2025 and March 2026, on the buyer’s definition. It changes one thing in the seller’s proposal, the definition. Every balance in it is audited or reported, not estimated. The trailing 12-month average of the normalised month ends, $(18.4) million, is the cross-check. December and March each sit $1.3 million above it, so the actual dates are not outliers. Ten of its twelve points are estimates, which is why it is the fallback rather than the pick.

Each candidate’s price effect depends on growth. NWC here is negative and grows more negative as revenue grows: the illustrative closing balance is $(18.9) million on run-rate revenue of $523.5 million. A peg set on trailing balances is therefore above the closing balance, and the buyer pays $2.4 million less at closing. The seller’s natural counter is a growth-adjusted peg, NWC days applied to run-rate revenue at closing, of $(22.4) million. That turns the adjustment into a $3.5 million payment to the seller. The collar matters as much as the method. A peg close to the closing balance leaves the shortfall inside the collar: the trailing average falls $0.5 million short and the March 2026 balance $1.8 million short, so neither pays anything, and each costs the buyer the full $2.4 million the selected peg recovers. The peg negotiation is about method and collar together, and it is worth single-digit millions either way.

A month-specific peg is the alternative for a business this seasonal. The normalised months span $13.5 million, and a December closing would use December’s balance. Here the normalisation already removes the largest seasonal item, power, so one peg is enough.

Deferred revenue: inside or outside NWC

Current deferred revenue, $13.8 million at December 2025, stays in NWC. The non-current $4.8 million stays out.

The current balance is rent billed in advance and the current part of cross-connect install fees. It is replaced every month, so it belongs in the working capital cycle and in the peg, and taking it out of both would be hard to defend. The non-current balance is install fees and prepaid rent earned more than a year out. It does not turn over in the cycle, so it sits outside NWC. The QoE agrees on both points: its table carries the current balance and leaves the non-current one out.

The closing true-up

At an illustrative December 2026 closing, nothing is adjusted at closing, and the final statement 90 days later produces a $2.4 million true-up in the buyer’s favour. The escrow pays it and releases $2.6 million to the seller.

The equity purchase agreement arrives only in Phase II, so the mechanics are illustrative. The seller delivers an estimated closing statement, and the price paid at closing is adjusted by its NWC against the peg. The illustrative collar works the same way at both statements: no adjustment while NWC is within $2.0 million of the peg, and the whole difference, from the first dollar, once it is outside. The seller’s estimate is $0.4 million below the peg, inside the collar, so nothing is paid at closing. The buyer prepares the final statement within 90 days, on the same definition and accounting policies as the peg. Final NWC is $2.4 million below the peg, outside the collar, so the final adjustment is the full $2.4 million. The true-up is the final adjustment less the adjustment already paid at closing: $2.4 million, paid to the buyer from an adjustment escrow funded at closing. It is larger than the $2.0 million gap between the two statements because the estimate’s $0.4 million shortfall was never paid at closing. A closing statement prepared on any other basis than the peg reopens every definitional point above.

The staple financing (11.10) bears on working capital in two places:

• The revolver. It is $150.0 million, for working capital, letters of credit and general corporate purposes, and undrawn at closing. Liquidity for the NWC swing comes from it, so the seller has no case to be paid for cash “trapped” in working capital.
• The letter of credit sublimit. It is $50.0 million and covers utility deposits. If the company has posted utility deposits in cash, letters of credit would release that cash after closing, and the seller may ask to be paid for it.

What goes in the indication

Section 3(c) of the process letter asks for the assumed NWC and the methodology, and the workbook gives both:

• Assumed NWC: $(16.4) million.
• Methodology: the average of the December 2024, December 2025 and March 2026 balance sheets, the seller’s own dates, on a definition that adds accrued property taxes and the receivables and other current assets the QoE leaves out, and keeps tenant deposits outside NWC.

Phase II then needs a breakdown of payables and accruals, the month-end balance sheets the QoE says management is compiling, the property tax payment calendar, and where tenant and utility deposits are held. The same NWC definition carries into the LBO model, where NWC is projected by days and the change in NWC enters the cash flow.

Methodology. Project Voltaic and Ironvale Digital Infrastructure are fictional; every figure comes from the example’s data room and from the workbook built in Compound on it. Balances are from the audited FY23 to FY25 statements and the unaudited Q1 FY26 statements. Monthly NWC between the three actual balance sheets is estimated from the FY25 management accounts, the invoice register and the power billing schedule, and labelled as estimates. Construction and other accruals is a residual of the payables caption. The closing date, the run-rate revenue, the collar, the escrow and the seller’s estimate are assumptions, labelled in the workbook. The purchase agreement terms are illustrative because the data room does not yet contain one.

FAQ