The buyer's draft purchase agreement specifies a cash-free, debt-free transaction, but we hold significant customer deposits for future work. How do we prevent the buyer from pocketing these deposits while forcing us to perform the work post-closing?

Question

Tyler Smith · Accepted Answer

A cash-free, debt-free deal structure is standard in middle-market M&A, meaning the seller keeps all cash and pays off all debt before close. However, buyers frequently attempt to classify customer deposits or unearned progress payments as free cash that you must leave in the business, or worse, they treat them as a liability that reduces your purchase price.

Customer deposits represent cash paid in advance for work that has not yet been performed. If you pocket this cash at close, the buyer is left with the liability of executing the contract without the cash to cover the payroll and materials. Conversely, if the buyer takes the cash without a corresponding working capital adjustment, they are getting a windfall at your expense.

To resolve this, you must explicitly define how unearned revenue is treated in the Letter of Intent. Structure the deal so that customer deposits are included in the Net Working Capital calculation. If deposits are left with the business to cover future operational fulfillment costs, they must increase the working capital peg dollar-for-dollar.

Your Accountability Chart should clearly define who owns the customer fulfillment process to prove you have the capacity to deliver the work post-close under the buyer's ownership, ensuring a smooth transition without a financial penalty.