The buyer's draft of the purchase agreement includes our accrued employee bonuses and paid-time-off liabilities as debt-like items that will be deducted dollar-for-dollar from our cash proceeds at closing. How do we negotiate these operational liabilities out of the debt definition?

Question

Tyler Smith · Accepted Answer

Buyers frequently try to expand the definition of debt in a cash-free, debt-free deal to include working capital liabilities like accrued bonuses, vacation pay, and property leases. This is a backdoor attempt to lower the purchase price at the closing table.

You must establish a firm boundary between actual funded debt and standard operating liabilities. Funded debt consists of bank loans, equipment notes, and shareholder loans. Accrued bonuses and paid-time-off are operational expenses that are incurred in the ordinary course of business.

These operational liabilities should be handled within your net working capital target, not as a direct deduction from your purchase price.

To defend this position, show the buyer your historical balance sheets. If you have always carried a similar level of accrued PTO and bonus liabilities, and these are settled using normal cash flow, they belong in the net working capital peg. If the buyer insists on deducting them as debt, they are double-dipping, because they are already getting the benefit of these employees' ongoing productivity.

Bring this issue to your leadership team's attention and use the IDS® process to plan your response. Ensure your financial leaders have the data to prove that these liabilities have historically fluctuated in line with revenue.

If the buyer refuses to budge, suggest a compromise where only the extraordinary, non-ordinary-course bonuses triggered by the transaction itself are treated as debt-like items, while standard, recurring employee compensation remains in working capital.