The buy-side Quality of Earnings firm is proposing a working capital target that includes our customer deposits as part of current liabilities, which would force us to leave more cash in the business. How do we use our historical cash cycles and cash flow data to prove these deposits should be excluded from the working capital peg?

The buy-side Quality of Earnings firm is trying to pull a classic maneuver to increase the working capital peg, which effectively reduces your cash at close. By treating customer deposits as a standard current liability without matching them to the associated inventory or project costs, they are forcing you to leave your own cash behind to fund future work that the buyer will profit from. To defeat this argument, you must present a detailed analysis of your cash conversion cycle. Prove that these deposits are not passive liabilities but are advanced funding mechanisms directly tied to specific, near-term project expenses. First, pull your project accounting records and match every customer deposit with the corresponding purchasing and labor schedule. Show that these funds are deployed immediately to acquire materials or secure labor within thirty to sixty days of receipt. Second, use your weekly Scorecard history to demonstrate that your cash position matches your project pipeline. Prove that if you left these deposits in the business as working capital, the buyer would receive a double benefit: they would get the cash and the completed project inventory, while you would receive nothing for the work already done. Insist on a net working capital definition that excludes customer deposits from the calculation entirely, or adjust the peg downward by the average balance of deposits held over the last twelve months. This ensures you walk away with the cash you have earned.

Category: Valuation & Deal Structure