The LOI specifies a debt-free, cash-free transaction, but the buyer is trying to classify customer deposits as debt while keeping our operating cash. How do we protect our proceeds?

Question

Tyler Smith · Accepted Answer

In a debt-free, cash-free transaction, buyers frequently attempt to classify deferred revenue or customer deposits as debt. Their logic is that these deposits represent a future performance obligation. However, if they classify them as debt, the purchase price is reduced dollar-for-dollar, while they also keep the cash you received for those deposits, resulting in double-counting that hurts your proceeds. To protect your cash, you must establish a clear definition of working capital and debt in the letter of intent and the definitive agreement. Customer deposits should be treated as part of net working capital, not debt. The cash associated with these deposits must be included in the target working capital calculation, ensuring that you are properly compensated for the obligations you hand over. Ensure your finance leader has the GWC to defend this position. During due diligence, have them prepare a detailed ledger showing how customer deposits are earned and how the associated costs are managed. By presenting this clean financial data, you can prove to the buyer that customer deposits are an operational liability covered by standard working capital, not debt. This ensures you walk away with your cash.