The purchase agreement states our deal is structured on a cash-free, debt-free basis, but the buyer claims our operating checking account balances belong to the business at closing. How do we prevent cash-stripping traps during final settlement?

Question

Tyler Smith · Accepted Answer

In a cash-free, debt-free transaction, the seller is entitled to sweep all cash from the company and pay off all funded debt obligations as of the closing date. However, buy-side deal teams often exploit ambiguous wording in the definitive purchase agreement to capture operational cash balances.

The most common tactic is the working cash argument. Buyers frequently claim that an operating balance is needed to fund daily payroll or vendor invoices, arguing that this cash is an operational asset that must remain inside the business without any purchase price credit. Another trap involves treating uncleared checks, customer deposits, and merchant processor sweeps as liabilities while ignoring offsetting cash entries.

Protect your cash proceeds through precise legal definitions:
- Define Cash explicitly in the purchase agreement to include all cash, cash equivalents, certificates of deposit, and bank balances, adjusted solely for deposits in transit and outstanding outbound checks.
- Keep Cash entirely excluded from the Net Working Capital formula so that you receive a dollar-for-dollar credit for every dollar left behind.
- Define Funded Indebtedness strictly as interest-bearing bank debt, capitalized lease obligations, and third-party notes, preventing operational accruals from being categorized as debt-like deductions.
- If the buyer requires an opening cash balance on day one, treat that specific amount as a dollar-for-dollar cash purchase price increase on the settlement statement.

Review these settlement mechanics with your corporate counsel and EOS finance seat well ahead of the final closing wire.