The buyer is insisting on a cash-free, debt-free transaction but is defining cash to include customer deposits we have already received for unperformed work. How do we prevent them from taking both our cash deposits and demanding we perform the work post-close for free?

Question

Tyler Smith · Accepted Answer

Buyers almost always insist on a cash-free, debt-free transaction, meaning you keep your cash but pay off all debt before closing. However, conflict arises when the buyer tries to categorize customer deposits or deferred revenue as working capital that must be left in the business, while simultaneously taking the actual cash associated with those deposits. This is double-dipping. They want the cash to pay for future operations but want you to deliver the services post-close for free. To defeat this, you must separate customer deposits from normal operating cash.

- First, argue that customer deposits represent unearned revenue and must be backed out of the Net Working Capital calculation entirely.

- Second, structure a mechanism where you leave the cash deposits in the business at close, but receive a dollar-for-dollar increase in the purchase price.

- Third, use your historical cash flow data to prove that these deposits are offset by immediate future delivery costs, which should be treated as a liability the buyer assumes with the matching cash.

By presenting this clear operational reality, you protect your proceeds and ensure the buyer does not inherit a pre-funded business at your expense. It maintains transaction equity and honors the actual cash flow metrics of your business.