The letter of intent states the transaction will be cash-free and debt-free, but we have significant customer deposits and deferred revenue on our balance sheet. How do we prevent the buyer from keeping our cash while forcing us to perform the work after the sale?

Question

Tyler Smith · Accepted Answer

In a typical cash-free, debt-free deal, the seller keeps all the cash on the balance sheet at closing, and pays off all debt. However, if your business collects upfront customer deposits or has significant deferred revenue, this definition can lead to a severe financial trap.

If you keep the cash from those deposits and walk away, the buyer is left with the legal obligation to perform the work and deliver the services without any of the cash to fund the operational costs. Consequently, the buyer will demand that this customer deposit cash remain in the business, or they will subtract it from the purchase price as a debt-like item.

To prevent this, you must negotiate the treatment of deferred revenue and customer deposits early in the deal cycle.

Use your Accountability Chart to define who is responsible for the delivery costs of this deferred revenue. Then, calculate the actual cost of delivery, including labor and materials, rather than the gross value of the contract.

Negotiate to leave only the direct cost of delivery in the business as part of the Net Working Capital target, allowing you to keep the profit margin portion of the deposit cash.

Document this clearly in the purchase agreement. Ensure that deferred revenue is explicitly excluded from the definition of debt, and instead treated as a working capital component with a clearly defined valuation cap. This protects your cash proceeds while ensuring the business is properly funded for transition.