The buyer is trying to classify our accrued but unpaid employee paid time off and our deferred tax liabilities as debt-like items to reduce our cash proceeds at close. How do we negotiate the treatment of these balance sheet liabilities within the net working capital peg instead of letting them become purchase price dollar-for-dollar reductions?

Question

Tyler Smith · Accepted Answer

Buyers will always try to classify liabilities like accrued paid time off and deferred taxes as debt-like items so they can subtract them dollar-for-dollar from your cash proceeds at closing. However, these are actually routine operational liabilities that should be handled within your net working capital peg. To protect your proceeds, you must establish a clear distinction between true funded debt and normal operational liabilities. Argue that accrued paid time off is a standard, recurring operating expense that fluctuates with normal business cycles. It is settled through payroll in the ordinary course of business, meaning it is already captured in your historical operating expenses and should be funded out of normal working capital. The same logic applies to deferred tax liabilities arising from normal timing differences. Work with your advisory team to construct a historical net working capital analysis that includes these accounts in the rolling average. By incorporating these liabilities directly into the working capital peg, you ensure they are offset by your operational current assets, such as accounts receivable. This prevents the buyer from double-counting these items and ensures you walk away from the closing table with your full purchase price intact.