We pay our annual leadership team performance bonuses in the first quarter of the year, but the buyer wants us to accrue these bonuses monthly on our balance sheet, which would increase our net working capital target at close. How do we negotiate this accrual out of the working capital peg?

Question

Tyler Smith · Accepted Answer

Buyers will try to include accrued bonuses as a current liability in the Net Working Capital calculation, which artificially inflates the working capital target you must leave in the business at close. If you leave more capital behind to cover these future payouts, you are effectively paying for those bonuses twice.

To negotiate this out of the peg, you must separate operational working capital from discretionary compensation. Argue that your annual bonus pool is a discretionary, performance-based incentive that is only finalized and paid at the discretion of the board or owner. Since these bonuses are not a legal liability until they are formally approved, they should not be treated as a standard operating liability.

Furthermore, you can propose a clear deal term where the buyer assumes the liability for the post-close portion of the bonuses, while you agree to settle the pre-close portion directly with your employees at the closing table. This is called a cash settlement of bonuses at close. You pay your team their pro-rata share of the bonuses using your transaction proceeds, and the liability is completely wiped off the balance sheet before the working capital peg is calculated.

This clean cut protects your cash. It ensures your leadership team is rewarded for their hard work up to the transition date, while preventing the buyer from using your bonus structure to reduce your proceeds.